Tax Crackdown On Crypto Puts Investors In A Tight Spot

All eyes were on Union Budget 2022-23 for some clarity on cryptocurrencies, especially as a precursor to the Cryptocurrency and Regulation of Official Digital Currency Bill. The good news: It was a matter of celebration that after four years, the government announced something progressive about crypto-assets–i.e., there was a recognition that there is a full-fledged market for cryptocurrencies. The bad news: If we read between the lines, it is a story of ‘tax them out of the system.’ 

Body Blow For Cryptos 

Let’s understand the fine print. When the finance minister started speaking about cryptocurrencies, there was an acceptance of a phenomenal increase in the transaction volumes, quickly followed by the expression that a scheme was needed to tax them, which is a positive sign because that would provide clarity to the investors and multiple stakeholders in the ecosystem. In addition, it was also, presumably, an indication of things to come in the much-awaited Bill in the monsoon session. Interestingly, in the Budget papers, too, cryptocurrencies have been mentioned as “virtual digital assets”, indicating that the Bill proposed will consider it an asset or a commodity and not a currency or legal fiat. 

However, then came the body blow–a 30 per cent flat tax rate was proposed. Not only that, a number of other conditions were included.  

Negative for taxpayers: There are many implications of this flat tax rate. For one, irrespective of the income slab, one will have to pay 30 per cent on all the gains from cryptocurrencies/virtual currencies, as one calls it. What is essential here to consider is that a tax like this, encompassing all taxpayers, seems quite impractical simply because the majority of the population does not pay any tax. They either come under the tax-free slab or pay rates of 10 per cent or 20 per cent. In other words, the Union Budget is making cryptocurrencies unviable and unattractive for the middle class, who wish to make some extra money by taking that extra bit of risk. 

In addition, the high rate of taxation ensures that only the upper-middle-class or the rich can take this risk.  

No time to balance out volatility: The Union Budget’s proposal that losses in cryptocurrencies cannot be set off, makes things more difficult. It means that an investor cannot adjust the losses or profits of crypto with any other income or losses in your current financial year. Furthermore, you cannot carry over the losses to the following year. That means that if the crypto market (which is very volatile) crashes on March 31, you will have to bear the losses in the current year. 

Hurting the wallet: Also, the Union Budget’s proposal that the gift income will be a liability on the hands of the recipient is somewhat incomprehensible. If somebody transfers to your crypto wallet, there is no way to decline it if the deposit address is known to the payer. It can potentially be used to play mischief on someone because he/she is not in a position to decline a transfer. This proposal, in effect, means that investors are discouraged from even having these wallets due to the fear of falling onto the wrong side of the tax department. 

However, that is not all. The Union Budget has chosen to take an extremely harsh step by imposing a 1 per cent TDS (tax-deductible at source) for each transaction. Here are some practical reasons for why this is discouraging. There is a good chance that a single investor may have several wallets in a decentralised ecosystem, and it is akin to a stock market investor having several demat accounts. So, charging 1 per cent on each transaction if one moves cryptocurrencies from one wallet to another is draconian. A similar transaction between two bank or demat accounts would not attract any TDS.  

Global Scenario 

Globally, things are pretty different. For example, in Japan, income from cryptocurrencies comes under miscellaneous income. Moreover, the tax rate is a function of the taxpayer's overall income, the highest being 55 per cent compared to stocks taxed at a peak of 20 per cent. In Korea, the model is based on profits, and the tax rate is 20 per cent on profits above $2,105. In the US, which still regulates cryptocurrencies, the tax rate is between 10 per cent and 37 per cent on short-term capital gains and 10-20 per cent for long-term capital gains. In Germany, the tax is paid as per the income slab of the citizen, regardless of the source of income.  

Yes, while it is true that most countries are still coming to terms with the way they want to tax the profits from investments in cryptocurrencies, most are looking at a model based on slabs rather than imposing a flat tax rate. 

Lets’ do the math: 30 per cent flat tax rate + 1 per cent TDS on every transaction + 18 per cent GST on brokerage/service fee + inability to set off losses. This is more than a deterrent. The 400 million Indian investors in cryptocurrencies, with over Rs 4-5 lakh crore investments, would be a worried lot. 

The author is CEO, CREBACO Global. Views are personal.