Union Budget 2022-23: Crypto Gains, NFT Still Significantly High; A 30% tax rate may not deter most investors

Indian Union Budget 2022: Cryptocurrency Beneficiary Will Pay 30% Tax

After months of speculation and waiting, the crypto ecosystem finally has a nod from the Indian government, albeit in terms of the tax regime. Early investors are especially rejoicing after years of rollercoaster signals from various authorities around the country. India is unlikely to get a crypto ban and it is progressive for the nation. The announced tax regime legitimizes the virtual digital asset class (including crypto and NFTs) and paves the way for a formal set of regulations in the future.

While there are enough reasons to celebrate as an ecosystem, we take the perspective of a common investor to understand the implications.

Taxation seems high

The new tax regime appears to be a mighty whiplash on crypto trading. With crypto being granted the highest tax slab for all asset classes at 30% and the implementation of a 1% TDS on larger transactions, investors may feel the pinch if they react to certain market movements with additional trades. However, we believe the gains from crypto and NFTs are still considerably high, and a 30% tax rate may not deter most investors. In fact, we are seeing a growth in the investor base due to the granting of legal status.

Investors should time the trade to optimize taxation

More than ever, crypto investors need to time their trades to ensure they are optimizing their tax liabilities. Because losses cannot be offset against other assets or carried over, any selling at a loss will be painful for investors. Since the crypto market exhibits considerable volatility, investors need to be patient in juggling both the market and the tax regime to maximize their returns.

Long-term investors need a helping hand

The current regime does not distinguish between short-term and long-term (more than one year) investments in the ecosystem. Long-term investing usually has a subsidized tax policy (or rebate) as it encourages investors to hold on to an asset to maximize their returns. We believe the government will revisit this issue in the future.

Accounting will be cumbersome

The government has put a lot of thought into the ecosystem and handed key responsibility for tracking and reporting gains to companies and investors. Investors who make thousands of transactions on exchanges over the course of a year will need to meticulously note and record them all to arrive at a tax liability. However, developed countries have systems and services that do so and so we expect services will evolve to incorporate this requirement. At Giottos, we are already building a product to facilitate this process to easily generate income statements and tax returns.

Education will be the key

There are a few details that need to be ironed out and explained for the common investor. Educating them properly will be crucial to the success of this tax system. We also believe that as more investors flock to the ecosystem and the government better understands how it works, we may see additional discounts and adjustments introduced to tax slabs.

Overall a welcome development

Although the government has taken a pragmatic approach to ensure that the growth of an ecosystem comes with certain limitations before its vast ramifications are understood, there are many benefits that the ecosystem can realize immediately.

This tax regime along with a Virtual Digital Assets Bill, when introduced, will legitimize all businesses operating in the country and enable consumer protections for investors. Standard regulatory compliance with regards to KYC and AML/CTF as well as tax compliance with regards to TDS and GST will be mandatory across all businesses and can help weed out some bad actors from the ecosystem. Exchanges and related platforms will become the legal guardians of the industry. Along with the digital rupee which is supposed to be blockchain-enabled by RBI, the Indian crypto community can trade their investments easily and with certainty.

Overall, we believe the crypto ecosystem, along with its businesses and investors, is poised for growth in the near future. The government has already laid the foundations for a thriving and sustainable industry.

The author is the CEO of Giottos Crypto Exchange. Views are personal.

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