Sumit Gupta, co-founder and CEO of Indian cryptocurrency exchange CoinDCX, recently spoke with crypto.news in an exclusive interview, discussing how cryptocurrency tax policies in India have impacted the industry.
The introduction of taxes on cryptocurrencies in the 2022 Union Budget marked a watershed moment for the cryptocurrency economy in India. Under Section 2 (47A) of the Income Tax Act, 1961, cryptocurrencies are classified as Virtual Digital Assets (VDA).
A sector that was once mired in ambiguity has been injected with a sense of legitimacy and set toward a clear regulatory path.
However, regulatory clarity came with some burdens of its own. The 30% tax rate, coupled with an additional 1% TDS on transactions, quickly became a deterrent for retailers. Trading volumes have collapsed, pushing the cryptocurrency economy underground or to more tax-friendly shores.
However, industry experts like Gupta are in favor of the official recognition and regulated environment for cryptocurrencies that now exists.
Although more than a year has passed since the introduction of this new framework, confusion and widespread misconceptions still exist among new and experienced investors. The everyday investor is still grappling with the complexities of reporting and calculating taxes on their transactions, especially regarding ownership, mining, and use of cryptocurrencies in day-to-day business transactions.
Gupta looks to clarify some of the more complex aspects of cryptocurrency taxes, address common misconceptions and provide a clearer understanding of the regulations.
Can you explain the different tax treatments for profits generated from trading, mining and storing cryptocurrencies and how these rules affect investors? For example, how does the 30% flat tax on trading and mining compare to the income tax bracket rate applied to accumulated rewards?
Cryptocurrency trading and mining profits are subject to a flat tax of 30%, with no deductions or loss offsets allowed. However, the accumulated income is taxed based on an individual's income tax slab, which may offer a lower rate. The Web3 sector, including CoinDCX, is urging the government to reduce the 30% tax rate on virtual digital assets (VDAs) to bring it in line with other asset classes, especially securities. The high tax rate and disallowance of loss compensation discourages entrepreneurship, innovation, job creation and foreign investment, which can drive talent and capital abroad. Adjusting these tax policies can promote growth and innovation within the industry.
What are the most common misconceptions you've encountered about cryptocurrency taxes, and how can investors avoid these risks?
It is necessary to dispel the misconception that all cryptocurrency activities are taxed at 30% or that staking rewards are only taxed upon sale. Staking bonuses are taxable upon receipt, based on market value. In addition, trading losses cannot offset other types of income. Investors should keep detailed records and seek specialist tax advice for effective navigation and compliance. CoinDCX has partnered with KoinX to help users file cryptocurrency taxes. This platform allows users to track tax calculations, connect multiple exchanges and wallets, and view real-time tax amounts for all cryptocurrency transactions, including NFTs and DeFi investments.
How do you anticipate potential changes in global cryptocurrency regulations, particularly those discussed at the G20 meetings, impacting India's position on both general cryptocurrency regulations and taxation?
The G20 discussions, especially those held in India, have provided a powerful platform for shaping global cryptocurrency regulations. Such broad consultations are crucial to developing comprehensive frameworks that can be adapted by individual countries. For India, these discussions provide a model of regulatory clarity, ensuring a balanced approach that benefits all stakeholders. The inclusion of Virtual Digital Asset (VDA) transactions under the Prevention of Money Laundering Act (PMLA) is an example of this regulatory clarity, allowing policymakers to oversee the cryptocurrency space and effectively discourage illicit activities.
Accordingly, how has the inclusion of cryptocurrency transactions under the Prevention of Money Laundering Act (PMLA) impacted the cryptocurrency industry's compliance and operational practices in India?
Listing VDA transactions has been a win-win situation because it gives policymakers a platform for oversight and discourages illicit actors. This regulation entails strict adherence to KYC (Know Your Customer) and AML (Anti-Money Laundering) procedures, enhancing transparency and reducing the risk of illicit activities. The Bharat Web3 Association has released a case study detailing the implementation of these regulations, showcasing the industry's active support and the pivotal role played by the Financial Intelligence Unit (FIU) in India.
Given these regulatory changes, what are the specific challenges faced by high-frequency traders in India due to the 1% tax deduction at source (TDS) rule, and what strategies can be used to mitigate these issues?
The 1% TDS rule poses significant challenges to traders in India, primarily by reducing liquidity and pushing users towards offshore exchanges that do not deduct TDS. This has resulted in a massive shift of more than 95% of trading volumes to exchanges outside India, negatively impacting local players. To mitigate these issues, the industry is calling for TDS to be reduced to 0.01%, which would help maintain government oversight while keeping the market attractive to investors. It also reduced liquidity for high-frequency traders by a large margin. However, due to CoinDCX's product and reputation for a compliant business, we have seen some positive movements and users coming back to us since India's FIU banned the non-compliant offshore exchange. However, there is still a large portion of users migrated with non-compliant exchanges and facing exposure to illicit actors.
Do you think there is a chance that the government will reduce the tax burden on cryptocurrencies?
The industry has called for TDS to be reduced to 0.01%, which would maintain the government's goal of tracking financial flows while making the market more attractive to investors. We hope that the government will consider this request to reduce the tax burden on cryptocurrency transactions, especially the TDS rate, to promote a more conducive environment for innovation and investment.
Finally, if it were up to you, what approach would you take to balance innovation and ensuring compliance?
Balancing innovation and tax compliance requires a careful approach, where regulations are clear and supportive of technological progress while ensuring strong oversight to prevent abuse. Engaging with industry stakeholders and studying global best practices can help create a balanced framework. We also released a white paper recently, where we studied global and Indian economic literature, and it points to the same conclusion.