• The tax rate is on par with gambling and lottery.
• Indian traders with a cent in crypto profits will now have to pay tax and file returns.

The government of India has officially imposed taxation regime on cryptocurrency gains – despite the expectations that the Indian government will table a bill regulating digital assets, the Minister of Finances has surprisingly introduced the new crypto taxation law coming into effect as early as this April – upon the new financial year.

Although the majority of the local crypto industry members are optimistic about this, hoping that this will legitimacy to cryptocurrencies, many are concerned with the nuances of the new taxation rules.

First of all, the announced crypto tax rate is higher than any other asset class in the country – securities are taxed at a long-term capital gains tax rate of as little as 10% and short-term capital gains at a rate of 15%. 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.

Furthermore, new crypto taxation legislation explicitly rules out the exemption of crypto gains under any deductible sections, which will force those involved in crypto trading to file income tax returns even if they make as little as a cent from crypto profits: the usual minimum income tax 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.

As a result of those amendments to Indian tax legislation, many crypto exchange executives expect much lower trading volumes on their platform. 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. “Markets 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.”

However, all of the above-mentioned rules, even though they are being harsh, the industry is 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, although 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.”

On the other side, 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.”

There is still a number of questions in regard of this modern industry future in India – it is still unclear which agency will regulate it and the exchanges remain unregulated. 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.

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