I never intended to cover this topic. Currently, everything around the budget is a mere speculation. Each expert has their own opinion and when you ask them a tough question, they say there’s no clarity on that yet. I am not blaming them at all. There is actually no clarity. We’re expecting to get some clear understanding before the budget comes into effect on April 1st, 2022. Until then, I want to do another informative yet rant post on the taxation.
First things first, I had an inspiration of writing this blogpost when I saw a decade old meme resurface. Simply replace “straight to jail” with “tax” and you will know why I say so.
Responses to Crypto Taxation:
When the budget came out, I could see a clear division amongst the different sections of the industry. I am sure you would have observed these polarized parties too if you ever tried to discuss budget with anyone:
A. The Shocked Shamans:
These are the people who are extremely shocked with this decision. I don’t know what they are thinking. You make gargantuan gains on your doggy coins and then leave the country. Is that the plan? No right? So why shy away from a tax. It was always on the charts.
Governments tax every source of income out there. Why would crypto be different?
Some of my friends made up their mind to sell crypto because it’s taxed now. So is a fixed deposit? What are you thinking.
Agreed 30% seems quite steep but it is an initial step towards regularization. Let us see where it goes.
The best thing that came out of this set of people was some awesome memes.
B. The Regulatory Consolation:
Guilty! I was one of these people too. In fact all crypto maxis were a part of this clan. Celebrating the fact that at least government has acknowledged crypto. And that’s true as well. From outright ban or ignorance, government at least put some rules around it. Started calling it a digital asset and not a ‘vice’.
Well, we all thought so. Until we realized that our honorable Finance Minister recently said in a statement that taxing crypto does not mean it is legal or illegal. I guess “you can’t have both sides of the coin” does not apply on the government.
C. The On-Chain Legions:
Well, not joking, I was a part of this clan too. I think I still am. These guys don’t invest in centralized exchanges. These DeFi degens deal with the likes of Metamask and dApps. If you’re not sure what I am saying, refer to this article here.
Coming back to taxation. The idea is how can government track on-chain transactions in it’s entirety? This means one could save on tax if they go full on-chain right? Wrong!
Let me tell you, it may sound extremely lucrative but that’s an equivalent of tax evasion. If somehow government knows about this, you would not only be liable to pay taxes but also a massive penalty depending on the amount.
D. The Rational Gentlemen:
Well, we wish all of us were there. But only a a few individuals took the news for what it is and tried to help the community in understanding the crypto taxation laws. For example, Rohas Nagpal, read all 282 pages of the doc released by the government and did a live session on the night of the ruling to enlighten us.
But What is the New Tax Law?
Disclaimer: I am not a tax expert and this is a developing story. We would have a much in depth understanding of these regulations once this bill passes and becomes a law.
Let us read the verbatim first and then try to break it down. As per the government:
Income from transfer of digital assets such as crypto to be taxed at 30%. No deductions will be allowed except the cost of acquisition of digital assets. Loss on sale of digital assets cannot be set off against any other income. TDS at 1% will be levied above the threshold. Gifting of digital assets will also be taxable in the hands of the receiver.
The definition of cryptocurrency as per the new rules is a decentralized digital asset and a medium of exchange based on the Blockchain technology.
Here are a few points that are worth deliberation and still need some clarity before this bill turns into a law:
A. No Set-Off:
Usually when you purchase stocks, you are liable to paying taxes on your profits. These profits can be set-off against losses. For example, you purchased two stocks A and B. You made a profit of Rs. 1000 on stock A and a loss of Rs. 500 on stock B. You would have to pay taxes on (1000-500) i.e. Rs. 500.
This is not allowed in crypto though. Losses would be yours solely and government would take a share of profits. Ouch!
This is yet another area that requires a lot of clarity. TDS or tax deducted at source is a type of tax that is deducted by the service provider itself at the source of delivery. In crypto context, this would mean that centralized exchanges like CoinDCX, would hand over the assets to you after deducting 1% of it?
If that is the case, apart from logistical nightmare, this is going to hamper a lot of trading. For the uninitiated, trading forms the biggest chunk of revenue for all crypto exchanges out there.
Another noteworthy point to mention here is the treatment of income from crypto assets. There is a clear demarcation in stocks in terms of LTCG, STCG etc. Something very similar is on the charts for cryptocurrency as well. Here’s an infographic from cleartax the captures the essence of what I am trying to say:
As someone who regularly invests in crypto, I welcome the regularization aspect of it. I am not the one who wants to join the raunchy narrative of overthrowing central powers. If this is going to happen, it needs to have the backing of the government. However, a lot of clarity in terms of legality still needs to be there when it comes to crypto taxation. For now, our best bet is to stay calm and hope government adopts a progressive approach.