Recently, I got myself into yet another conversation around taxation. It was on a Telegram group of crypto enthusiasts. There was this usual rant around government imposing draconian crypto taxation regime. So after convincing them for a while, I started getting backlash. At this point, I asked one of them that how much tax are they willing to pay. To my surprise they mentioned something to the tune of 2-5%.
Now here’s the problem. Our expectations are too damn high. For your reference, we pay somewhere around 10-20% capital gains tax on our equity holdings as well. I agree there is a margin for improvement in terms of offsetting of losses, some initial exemption etc. But if you believe that the government will let you off this hooks with a measly 2%, well, you might be in a wrong country altogether.
And while this was fresh in my head, yesterday, the GST council of India hinted at imposing a 28% GST on crypto transactions. This is in addition to the 30% tax already levied by the government on all gains made on digital assets. While #GSTonCrypto trended on Twitter for a while, the noise around bear market was enough to suppress it soon.
Out of all the brilliant memes that came out of this conversation, one of them particularly caught my eye. (Refer to the image)
While it looks like a hearty attempt to take a jab at the current tax situation, I wanted to highlight that this is far from reality. Even the understanding around GST on crypto is half baked at best right now.
Some Common Misconceptions Around Taxation:
Every time the topic of taxation pops up, I can see the pent up anger inside a person’s soul. And I understand. Who like taxes after all. But the problem with anger is that it often blinds you. So today, I will try my best to share certain misconceptions that I have come across and throw some light on them.
A. 30% of What?
Let’s take it from the top, shall we? I have had multiple conversations where people think that their entire principal amount is going to be taxed at 30%. They would often say that their portfolio is up by 25% and the government is going to take away all of it.
Well, if you are one of those people, I have good news for you.
The tax is applicable on the profits made by you. So if you invested $100 in a digital asset and exited with $150 in hand, the government is going to charge you 30% of $50 i.e. $15.
B. TDS Makes it 31%:
There’s another notion that states 1% TDS is over and above 30% tax. Well, that is not correct. TDS by name stands for ‘tax deducted at source’. You could get a rebate of TDS while you are filing your taxes. So that 1% which catches the eye is a part of the 30% mentioned above. Government usually puts TDS in place to track funds.
C. GST will take it all from us:
Finally coming to the 28% we have just heard about. I believe that 28% is going to be levied on maker and taker fee. It is not going to eat a chunk out of your profits. For the uninitiated, the government already levies 18% GST on these transactions. They are proposing to increase it to 28% now.
Are these Taxes Going to Kill Crypto?
Well, there is a long and a short answer to this question. I would start with the longer version. In my opinion, it is very difficult to regulate an asset like crypto for a country of our size. Compare it with China which has a similar population. They banned crypto outright.
So here are a few reasons I think crypto taxation is in a way a good move:
A. Acknowledging Crypto’s Existence:
The Indian government has at least taken steps to regulate this asset class. It would have saved them a ton of time, money and effort to simply put a blanket ban on crypto assets.
I think this is a step in the right direction. It clearly shows the intent of the government to understand and regulate this space. After years of ignorance, they have finally come to acknowledge the existence of crypto.
B. Regulation Safeguards You:
A few months ago there was some glitch at NSE. This led to halting the trading for a few hours. Post that, some experienced, advanced chaps exploited this situation and made money out of it. A few days later, government stepped in and penalized the players at fault.
Now let’s talk about crypto. Every time there is a market crash and an opportunity to arbitrage, WazirX, CoinDCX and CoinSwitch Kuber halt the INR deposits. Don’t you want them to be answerable? If yes, they got to come under the government radar.
C. Tracking Money Trail:
Now this may sound like snooping. But I think in order to track illicit funds, government needs to have systems in place that would help them track the money. By taxing the cryptocurrency, government is ensuring the KYC AML regulations are in place.
The Flip Side of Taxation:
I agree that 30% is a tad bit much. We could have lived with a lesser bracket too. However, it’s not written in hard stone. Government can reconsider it in the upcoming budgets as well.
For your reference, when income tax laws were formulated after independence, the highest tax slab was fixed at 97.75%.
With that being said, there is a significant chunk of the population that would face severe implications because of this.
Yes, traders might find it really difficult to manage the 1% TDS for their daily transactions. I would not deny the fact that this tax structure might be specifically aimed at reducing speculation and hence trading.
To summarize everything, just like Blockchain and Cryptocurrency space, everything is evolving right now. Who knows what narrative takes over in the upcoming days, months or years.
Nonetheless, we’d all agree on one fact. It is an exciting area to be in. I’d like to quote Sandeep Nailwal– Founder of Polygon.
“A month in crypto is equivalent to 3 normie months”
What are your views about the taxation?
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Until next time..
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