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The State of Crypto Taxation in India: Past, Present and Future

India’s current fiscal year ending in March is the first fiscal year where India, the country that hosts the largest percentage of crypto users in the world, finally provides clarity on crypto taxes. Anyone who is a tax resident of India and makes money in crypto – whether they are a trader, miner, yield farmer or airdrop recipient – must declare their assets and pay a tax under the new Finance Bill of 2022.

This piece is part of Tax weeksponsored by Koinly.

Officially, however, India has not yet decided whether cryptocurrencies are even legal.

“[Whether crypto is] legal or illegal, that is another question, but I will tax because it is a sovereign right to tax,” Finance Minister Nirmala Sitharaman said in February.

Lipsa Das is a freelance crypto writer and strategist based in India.

While the legality of crypto in India is still a matter of debate, the government has taken steps to crack down on its use — with several investigations into major cryptocurrency exchanges and notices to high-net-worth individuals. Below, we examine how the regulatory landscape in India has evolved over the years and look at the impact that taxation has had on crypto.

A timeline of India’s crypto laws

The Reserve Bank of India and the government have historically been concerned about crypto transactions, with warnings and bans on the strict new tax bill. Here’s a quick timeline of how crypto has fared in India over the years:

  • 2013: The RBI issues a circular warning investors about speculative investments such as cryptocurrencies.

  • 2013-2017: Along with the movement towards digital payments in India, the crypto industry establishes its roots. Indian exchanges like Zebbay and Unocoin are starting to gain traction.

  • 2017: Two writ petitions are filed – one to ban cryptocurrencies and one to regulate cryptocurrencies. The government is forming a regulatory body to further investigate cryptocurrencies.

  • 2018: Despite multiple warnings by the RBI, Indian crypto markets add a record number of users. To counter the trend, the RBI issued a circular in April restricting banks and lenders from any association with crypto exchanges, effectively strangling the booming industry.

  • 2019-2020: Indian exchanges and blockchain advocates go to court and file multiple petitions in an attempt to overturn the cryptocurrency ban.

  • 2020: After a protracted case, the Indian Supreme Court finally overturns the RBI order, declaring it unconstitutional to ban trading without any regulations. This coincides with the crypto boom of 2020 and serves as the break that the Indian crypto market desperately needs.

  • 2021: The government continues its efforts to limit the crypto industry by proposing a general ban on private currencies and introducing a private central bank digital currency instead.

  • 2022: While crypto laws are still under discussion, the budget bill specifying crypto tax regulations is approved in March.

Before the 2022 budget bill, Indian government officials did not have an official position on the taxation of cryptocurrencies, but that does not mean that the tokens are not taxed.

Any profit made from the trading of cryptocurrencies has often been treated as “business or other income” and taxed as such. In contrast, if a taxpayer purchased crypto as an investment, it would be categorized as a capital asset, provided their overall trading activity was infrequent in nature. Upon sale of said cryptocurrencies, it will be subject to a long-term or short-term capital gains tax depending on the holding period.

In the absence of a regulatory framework, there was no uniformity in how crypto transactions were reported, and in some cases they were not reported at all. For example, taxes could only be realized when crypto was converted to fiat. So, if you were to exchange two different cryptocurrencies on your MetaMask wallet, you were not legally required to report it.

The Finance Bill of 2022 initiated a complete overhaul of how cryptocurrencies are treated in India.

The new standard for crypto-tax

The Finance Bill has been one of India’s first laws to recognize cryptocurrencies since April 1. Importantly, it classifies cryptocurrencies as “virtual digital assets”, separating them from central bank-backed “currencies”.

The definition of “virtual digital assets” is deliberately broad and covers all cryptocurrencies, tokens and NFTs (non-fungible tokens). But because the terminology is relatively new, the definition is still evolving. For example, a circular dated June 30 exempted gift cards, reward points and subscriptions from being categorized as virtual digital assets or VDAs.

So what is taxed?

According to section 115BBH of the Finance Bill, a chargeable event is defined as:

1. Converting a VDA to Indian Rupees or any other fiat currency.

2. Conversion of one type of virtual digital asset to another type (crypto-to-crypto trading, including stablecoins).

3. Pay for goods and services with a virtual digital asset.

All profits from the above transactions are subject to a 30% tax, which is equivalent to India’s highest income tax bracket. There is an additional surcharge that depends on the income group of the individual. Furthermore, if the transaction exceeds 10,000 rupees, it will be taxed at an additional 1%.

However, not all crypto transactions are subject to the 30% tax. Activities such as giving crypto, staking rewards, receiving payments, airdrops, mining coins and other DeFi (decentralized finance) transactions are still considered “income”. In such cases, tax is calculated according to the recipient’s income tax rate.

However, if you choose to keep the assets and sell them later, you will be liable to pay a 30% tax on any increase in asset market value.

What about losses?

One of the most criticized aspects of crypto tax law in India is that losses are not recognised, which means you cannot offset capital gains against losses or business expenses. In an industry where losses are more common than gains, this clause is a clear attempt to curb cryptocurrency transactions.

The impact on traders and retail investors

“The 1% TDS (tax deducted at source) no longer makes high frequency trading viable in India. Traders lose 1% capital on every sale,” says Anoush Bhasin, a crypto tax advisor and founder of Quagmire Consulting.

The data confirms this: The introduction of this tax combined with the bear market caused the volumes on major exchanges to drop significantly. As a result, traders are forced to make more calculated decisions, taking into account the impact of taxes on the success of their trades. That they cannot offset their losing operations against their winnings is the nail in the coffin.

“Furthermore, the TDS compliance burden makes filings very complex.” Bhasin added. “There is no regulatory clarity on TDS for decentralized exchanges, non-custodial wallets or custodial exchanges.”

There has been a significant shift among some crypto holders in India to a long-term attitude to avoid taxes – or at least make paying taxes worthwhile.

“India has changed laws drastically before, and those who held during the 2018-2020 ban were the ones who benefited the most,” speculated a trader who wished to remain anonymous. “At least my family doesn’t think I’m involved in anything illegal right now.”

The impact on new and existing crypto businesses

Blockchain consultants and lawyers are noticing a significant brain drain from India and an overall preference to set up shop in nations that are more crypto-friendly.

“Existing businesses have moved overseas in search of less complicated regulations,” Bhasin said. This includes major players such as the founders of crypto exchange WazirX and blockchain Polygon who both moved to Dubai.

“More than 40% of my blockchain clients have moved out of India, with Malta and Singapore being preferred destinations,” said Vijay Pal Dalmia, an advisor to crypto businesses and an advocate in the Supreme Court of India.

A new ITR (tax) concept proposed by the Indian government could target companies and individuals who have moved abroad but still have business ties to India. The new proposal requires foreign entities and individuals to disclose investments in India.

“If this ITR draft [targets us], we will be forced to consider the possibility of disabling our crypto offerings for India. Obviously, that would not be our first option,” said Aayushi Jain, co-founder of ZeroSwap, a Singapore-based decentralized exchange that has many users in India.

The impact of the new regulations also depends on the specific type of business. Some companies have turned to solutions that allow them to accept crypto payments.

“For crypto payments, we use payroll systems like Ontop that deposit Indian currency [a] bank account within three days,” said Uddalak Das, a crypto marketing consultant. However, the use of such payment systems introduces a middleman – the very thing that crypto aims to eliminate.

“The [majority of the] entities operating in India are back-end technology or support service providers, who can simply trade in fiat and have no touchpoint with crypto,” Bhasin said.

Look to the future

Most experts agree that India’s current tax laws disadvantage crypto and are regressive in nature. Changpeng Zhao, CEO of Binance, the world’s largest crypto exchange, recently said that high taxes could “kill” the industry in India.

And yet, India’s presidency of the Group of 20 nations in 2023 and its continued emphasis on crypto regulation suggest that the country will play a major role in shaping global crypto policies. Whether the agenda is to call for a global ban on cryptocurrencies or to provide a regulatory framework where innovation can flourish remains to be seen.

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