Cryptocurrency Should Be Classified As Regulated Asset Class. What Experts Are Saying

As the government gears up to announce its last full budget before the 2024 general elections, cryptocurrency experts seek the declassification of crypto as a highly speculative instrument to classify it as another asset class to benefit retail investors.

Edul Patel, CEO, and co-founder of Mudrex, explains that this would "allow proper regulations to be in place. Moreover, like any other asset class, offsetting the losses against the gains would encourage retail participation." As of now, a huge portion of investors are still conflicted about investing in crypto, and "that would change with these progressive regulations," Patel explained.

Chiming in similar sentiments, Rajagopal Menon, vice president of WazirX, said that virtual digital assets (VDAs) should be classified as a suitable asset class, similar to securities. The tax slabs and set-off benefits that apply to securities as an asset class should also apply to Crypto assets. "Securities are classified as an asset class based on the risks associated with them, with products ranging from low-risk government bonds to high-risk derivatives. As a result, VDAs should be appropriately classified and regulated so that investors can understand the associated risks and invest accordingly," according to Menon.

While last year it was proposed that gains arising out of virtual digital assets or crypto assets be taxed at a flat rate of 30 per cent, a 1 per cent tax deducted at source (TDS) was introduced on every transfer of such assets. Amanjot Malhotra, country head of Bitay, India, said that "the volumes of the VDA exchanges in India have suffered significantly after the introduction of TDS at 1 per cent, but Indians' interest has remained largely unchanged.

Indian exchange volumes have fallen by nearly 90 per cent, while Indian users' adoption of foreign exchanges has seen a massive rise. The high rate of TDS, introduced to track the movement of crypto assets, has only pushed transactions offshore."
According to Patel, "the 30 per cent taxation is a steep regime that needs to urgently change" for the retail investors to become involved. With more retail investors joining the ecosystem, crypto will move away from being a speculative instrument, "and that needs to be the highlight for the crypto ecosystem during the union budget," Patel feels.

Meanwhile, Malhotra said the high rate of TDS left Indian consumers to "trade on foreign exchanges, but their VDA activity is also not being tracked. I appreciate and support the objective of tracking VDA transactions, but this objective can be equally achieved with a lower rate of TDS at 0.01 per cent."

Experts have felt that the 1% TDS on sale transaction tax should be abolished or repealed as it causes investors to lose capital with each trade and discourages prospective investors from participating in this market. "The buyer deducts this amount from the amount owed to the seller. This essentially means that every trade would cost investors 1 per cent of their capital. While any TDS amount in excess of taxes due would eventually be refunded, it has had a crushing effect on day traders and short-term investors' capital," according to Menon. This could potentially discourage investors from taking part in Indian exchanges that are TDS compliant in favour of foreign exchanges that do not deduct TDS.

This is crucial because the policies' suitable amendments would uplift the industry's sentiment, including the users, exchanges, and web3. Menon further insists on the urgent need to classify VDA as a regulated asset class, similar to securities, and to bring taxation on parity with equity shares and derivatives by allowing set-off or the carrying forward of losses. "The 30% threshold was set in response to comparisons of digital assets to highly speculative avenues such as gambling, betting, and so on. VDAs are akin to securities trading, requiring clear ownership and title of the assets and sufficient liquidity to transact. The current tax slabs will only discourage and deter traders with a risk appetite from dealing in VDAs," Menon said.

On incentivising cryptocurrency as an asset class, Malhotra explained that the government "can move significantly in the direction of regulating crypto as an asset class and promote innovation in the country by supporting and promoting licensed and regulated web3 startups in India similar to what Dubai is doing currently."

Pitching towards making India a competitive country in the growing crypto industry, Ashish Singhal, CEO and co-founder at CoinSwitch noted that "while last year's union budget was about recognising cryptos, this year should be around refinement. We support the government's intention to trace and tax cryptos. However, it is essential to implement progressive taxation policies."