The Indian government officially brought in the cryptocurrency gains under the taxation regime on Tuesday. Though the government was expected to table a bill to regulate digital assets, the Finance Minister surprisingly mentioned the new crypto taxation rule in her budget speech that will come into effect from the next financial year commencing in April.

Tax Is Too High

The majority of the local crypto industry is optimistic after this as it will give cryptocurrencies legitimacy. But, many are pointing out the nuances of the taxation rule.

The government has kept the crypto tax rate higher than any other asset class in the country: securities are taxed at a long-term capital gains tax rate of 10 percent and a short-term capital gains tax rate of 15 percent.

In fact, the Indian government is looking at crypto gains similar to gambling and lottery earnings, where it levies a flat 30 percent tax rate.

“The taxation of profit from crypto assets at 30% may not receive equal appreciation from all the stakeholders. The higher taxes may discourage investors from choosing crypto as an investment avenue and delay the mass adoption of crypto assets in India,” said Jay Hao, the CEO of OKX.com.

Trading Volume Will Decline

Moreover, the new crypto taxation framework explicitly rules out the exemption of cryptocurrency gains under any deductible sections. This will legally force crypto traders to file income tax returns even if they make a cent in crypto profits: the usual minimum income tax slab to file a return is INR 250,000 (around $3,345).

Another rule that is being criticized by many is that the crypto traders will be not allowed to offset their losses from the market. It means crypto traders cannot offset losses from crypto trading against their other business profits.

With all these rules, even many crypto exchange executives are expecting much lower trading volumes on their platforms. Moreover, the 1 percent tax deductible at source (TDS) will further discourage traders. However, the TDS will put a tracker on all crypto transactions being executed on the Indian exchanges, leaving no room for a tax escape.

“The 30% tax without the option to set-off of losses against other tokens or deductions can lead to a drop in turnover,” wrote Nithin Kamath, the Founder and CEO of the country’s leading discount stock broker, Zerodha. “Market makers & active traders are usually 80%+ of turnover in most trading businesses. If costs can't be shown as an expense, losses can compound quickly.”

Industry Is Optimistic

Despite all the harsh rules, the industry is now optimistic about the future of cryptocurrencies in India. No, the tax laws do not legally define cryptocurrencies, but they definitely legitimize the digital currencies, when the industry was expecting a crypto ban by the government.

The ultimate fate of cryptocurrencies in India will be decided by the upcoming draft bill that is expected to be introduced in Parliament around May. But, it will be very hard for the government now to move from heavily taxing cryptocurrencies to banning them.

Shivam Thakral, the CEO of BuyUcoin, said: “The crypto investors in India must be extremely satisfied with this announcement as they can now execute crypto trading without any fear. The positive move by the regulators will legalize the billions of dollars invested by Indians in crypto assets and create a new tax revenue stream for the government.”

But, Kamath again pointed out that such laws around cryptocurrencies will change the core value with which Bitcoin was first introduced.
“Clearly, crypto, at best, will be treated as an asset and not a currency. If it's not a currency, it loses its primary use case. Whenever the crypto bill comes through, my guess is that they will want to ring-fence Indian crypto to restrict capital flows outside India,” he added.

“So, crypto will potentially be treated like stocks. They will probably have to be held in some demat equivalent overseen by a regulated entity. If this happens, crypto will be centralized and lose its next big advantage.”

Additionally, it is not clear which agency in the country will regulate the booming cryptocurrency industry, and the exchanges remain unregulated. But, they will have to ramp up their compliance efforts now.

Furthermore, without any legal status, the regulated Indian trading platforms cannot offer crypto products. Meanwhile, the Reserve Bank of India is likely to oppose the legalization of cryptocurrencies maintaining its long-standing stance towards the industry.

The Indian government officially brought in the cryptocurrency gains under the taxation regime on Tuesday. Though the government was expected to table a bill to regulate digital assets, the Finance Minister surprisingly mentioned the new crypto taxation rule in her budget speech that will come into effect from the next financial year commencing in April.

Tax Is Too High

The majority of the local crypto industry is optimistic after this as it will give cryptocurrencies legitimacy. But, many are pointing out the nuances of the taxation rule.

The government has kept the crypto tax rate higher than any other asset class in the country: securities are taxed at a long-term capital gains tax rate of 10 percent and a short-term capital gains tax rate of 15 percent.

In fact, the Indian government is looking at crypto gains similar to gambling and lottery earnings, where it levies a flat 30 percent tax rate.

“The taxation of profit from crypto assets at 30% may not receive equal appreciation from all the stakeholders. The higher taxes may discourage investors from choosing crypto as an investment avenue and delay the mass adoption of crypto assets in India,” said Jay Hao, the CEO of OKX.com.

Trading Volume Will Decline

Moreover, the new crypto taxation framework explicitly rules out the exemption of cryptocurrency gains under any deductible sections. This will legally force crypto traders to file income tax returns even if they make a cent in crypto profits: the usual minimum income tax slab to file a return is INR 250,000 (around $3,345).

Another rule that is being criticized by many is that the crypto traders will be not allowed to offset their losses from the market. It means crypto traders cannot offset losses from crypto trading against their other business profits.

With all these rules, even many crypto exchange executives are expecting much lower trading volumes on their platforms. Moreover, the 1 percent tax deductible at source (TDS) will further discourage traders. However, the TDS will put a tracker on all crypto transactions being executed on the Indian exchanges, leaving no room for a tax escape.

“The 30% tax without the option to set-off of losses against other tokens or deductions can lead to a drop in turnover,” wrote Nithin Kamath, the Founder and CEO of the country’s leading discount stock broker, Zerodha. “Market makers & active traders are usually 80%+ of turnover in most trading businesses. If costs can't be shown as an expense, losses can compound quickly.”

Industry Is Optimistic

Despite all the harsh rules, the industry is now optimistic about the future of cryptocurrencies in India. No, the tax laws do not legally define cryptocurrencies, but they definitely legitimize the digital currencies, when the industry was expecting a crypto ban by the government.

The ultimate fate of cryptocurrencies in India will be decided by the upcoming draft bill that is expected to be introduced in Parliament around May. But, it will be very hard for the government now to move from heavily taxing cryptocurrencies to banning them.

Shivam Thakral, the CEO of BuyUcoin, said: “The crypto investors in India must be extremely satisfied with this announcement as they can now execute crypto trading without any fear. The positive move by the regulators will legalize the billions of dollars invested by Indians in crypto assets and create a new tax revenue stream for the government.”

But, Kamath again pointed out that such laws around cryptocurrencies will change the core value with which Bitcoin was first introduced.
“Clearly, crypto, at best, will be treated as an asset and not a currency. If it's not a currency, it loses its primary use case. Whenever the crypto bill comes through, my guess is that they will want to ring-fence Indian crypto to restrict capital flows outside India,” he added.

“So, crypto will potentially be treated like stocks. They will probably have to be held in some demat equivalent overseen by a regulated entity. If this happens, crypto will be centralized and lose its next big advantage.”

Additionally, it is not clear which agency in the country will regulate the booming cryptocurrency industry, and the exchanges remain unregulated. But, they will have to ramp up their compliance efforts now.

Furthermore, without any legal status, the regulated Indian trading platforms cannot offer crypto products. Meanwhile, the Reserve Bank of India is likely to oppose the legalization of cryptocurrencies maintaining its long-standing stance towards the industry.