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Implications of tax on crypto assets in India

2022-03-23

Key Takeaways:

  • Indian government introduced a blanket 30% tax on crypto recipients, placing crypto at par with speculative activities like gambling

  • Crypto enthusiasts celebrate the Indian government’s first ever ‘recognition’ of the blockchain ecosystem valued around $16 billion

  • The Indian finance bill is broad enough to cover ‘Virtual Digital Assets (VDAs) but needs these assets to be characterized in depth to justify a blanket 30% tax on crypto in the country

  • Crypto and digital progress holds promise for India to reach its $5 trillion dream

At a time when crypto took the world by storm, it is a given that governments and central banks globally would want in, if not ban it altogether to regain their traditional authority. Recently, the Indian government introduced a blanket 30% tax on crypto recipients, placing crypto at par with speculative activities like gambling which has sparked debates about the economic implications of the policy and if there are better solutions available.

Global economies and their crypto policies

Economies all over the world are in the process of developing their own crypto policies which differ from each other wildly. In the US, crypto has long been recognised as a capital asset, subject to short-term and long-term capital gain tax by the recipient. Interestingly, this implies no tax liability if no gains are booked. Then in these economies, buying and simply holding these assets will not be subject to any taxation. Further, tax policies in developed economies seem much more nuanced than the Indian 30% blanket ban. Capital gains on BTC can reach 35% if sold within a year while taxes are much lower for sale after a year which also depends on individual income, much like the income tax structure we see today. Canada too recognises crypto as a capital asset. If treated as a part of income, it is well subjected to income taxes. Other economies like the UK and Australia also have a flexible policy, treating crypto as income or assets depending on how it impacts individual income, through capital gain or direct income. 

However, other significant economies have embraced crypto with more flexible taxation policies. Case in point, Europe’s largest economy, Germany treats crypto as a private asset, implying complete tax exemption if any sales are made after the holding period of 1 year. As extreme examples, Portugal has no tax policy for individual crypto owners, while companies or individuals trading professionally are subject to regular income tax where crypto is incorporated as income.

Possible Implications of Crypto tax in India

Coming back to the Indian case, what could be the implications of this crypto tax in a global economy? On the bright side, enthusiasts celebrate the government’s first ever ‘recognition’ of the blockchain ecosystem valued around $16 billion. This does quelch rumors of an official ban on cryptocurrency which would not just have impacted the ~15 crore Indian who have transacted crypto at least once (India houses the world’s 7th largest crypto owning population) but also official authorities which would have had to double down on tracking an underground economy which is anyway hard enough to regulate. However, it is naïve to assume this legitimizes crypto in India since every asset, even though not regulated, is subject to taxes. The Indian finance bill is broad enough to cover ‘Virtual Digital Assets (VDAs) but needs these assets to be characterized in depth to justify a blanket 30% tax on crypto in the country. Crypto presents complications not foreseen during the drafting of the Finance Bill – like the gray area of token ‘transfer’. Mining of coins through complex algorithms leads to miners being granted coins which may or may not be termed as an active transfer. How will the cost of acquisition be arrived at then to calculate the actual capital gain? Should such gains be taxed at the same 30%?

A crypto tax also runs the risk of spooking early investors who do not lie in the 30% tax bracket. Now, while profits made by the recipient will be taxed at 30% regardless of income, losses cannot be carried forward which would ideally have reduced the tax burden, further discouraging investors. Perhaps that was exactly the intention – after all cryptocurrency allows individuals like us to make capital gains (read how, here), transact across borders with ease & full transparency and become a part of what is most certainly the future of digital payments, without reliance on central authorities. (Indeed, the mysterious Satoshi Nakamoto explained the need of crypto as: “The root problem with conventional currency is all the trust that's required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.”)

In a global economy where governments differ in their stance towards crypto while private companies invest more and more towards R&D in the sector, a stringent policy regime would drive out business interest out of India to more flexible destinations like Singapore or Portugal. In fact most economies lie in the 2-15% crypto tax range today. Given some of the largest names in IT are interested in the sector, this could translate into an FDI outflow amounting in millions. Further, the blockchain universe has many use cases under development including DeFi, Decentralized applications (DApps), Web 3.0 gaming which can find a large market in India. Encouraging investments and market growth in such fields will not just provide the government with extra tax revenue but also help a futuristic industry flourish in India which could provide it a first mover advantage as an Emerging Market. Instead, a disproportionate tax runs the risk of market collapse resulting in complete loss of tax revenue by circumventing tax laws or changing destinations. Domestically speaking, individuals not falling in the 30% income tax bracket would have to file their returns for crypto separately, further straining both the individuals as well as the tax department.

Needless to say, crypto and digital progress holds promise for India to reach its $5 trillion dream. If the current policies are tweaked to be more accommodating, India can leverage these new age capabilities. Several businessmen in the crypto industry are also welcoming the policy with open arms as it provides some clarity about government support for the Indian blockchain industry which exists beyond cryptocurrency as well, which could boost investment and startups in Web 3.0, metaverse etc. This is perhaps the start of India’s journey of accepting crypto and all the benefits it has to offer.

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