India’s tax bogeyman is scaring off young crypto investors

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A down-on-its-luck Indi­an gov­ern­ment seek­ing its pound of flesh on the expo­nen­tial gains made in dig­i­tal assets is putting off investors in the asset class.

India will seek a 30% tax on all prof­its made off on the sale of vir­tu­al dig­i­tal assets and cryp­to assets start­ing April 1. It will deduct a 1% tax at source on every cryp­to trans­ac­tion start­ing July 1. The gov­ern­ment also won’t allow investors to off­set loss­es with gains made elsewhere.

If that wasn’t enough, the legal sta­tus of the asset class also hangs in lim­bo with the Reserve Bank of India repeat­ed­ly cau­tion­ing against cryp­to trans­ac­tions, and its deputy gov­er­nor even sug­gest­ing an out­right ban

“The tax­a­tion laws on cryp­to trad­ing are scar­ing me now,” said Sagar Chat­ter­jee. The 35-year-old entre­pre­neur was look­ing to invest in cryp­tocur­ren­cies and diver­si­fy his invest­ment portfolio.

“I will hard­ly be able to make any prof­its if I invest in cryp­to and my entire income will go into pay­ing all kinds of tax­es imposed on this asset class,” Chat­ter­jee told Forkast. “I much rather stick to mutu­al funds for now where I have con­sis­tent­ly booked prof­its with­out any wor­ries and there­fore have more con­fi­dence in the asset.”

See relat­ed arti­cle: Indi­ans see future in cryp­to, gov­ern­ment sees rev­enue, FM says

Chat­ter­jee is not alone. The dig­i­tal assets space has attract­ed most­ly young and first-time investors in a coun­try that will con­tin­ue to have one of the youngest pop­u­la­tions in the world till 2030.

Indi­an cryp­to exchanges say that about half of their users are below 35 and have rel­a­tive­ly bet­ter risk-tak­ing abil­i­ties with an incli­na­tion towards tech­nol­o­gy and inno­va­tion. How­ev­er, many of them are either in the low­est income tax brack­et or do not gen­er­ate suf­fi­cient income to pay tax­es at all.

India tax­es on a pro­gres­sive and pro­por­tion­al basis with direct tax on income rang­ing between 5% to 30%. An addi­tion­al tax of between 15% to 37% applies on the rich. All of this doesn’t include addi­tion­al levies uni­form­ly applied on all income brackets.

This par­tic­u­lar­ly hurts peo­ple at the low­er end of the income dis­tri­b­u­tion and younger investors with only salaried income. 

The addi­tion­al tax along with the volatil­i­ty in the asset class impacts returns when adjust­ed for risk. This is espe­cial­ly true in a ris­ing rates envi­ron­ment as investors find they aren’t com­pen­sat­ed enough for the risk in invest­ing out­side of a safe haven.

“You nev­er know what new things the gov­ern­ment will come up with,” 33-year-old Naimish Sanghvi told Forkast. The founder of cryp­tocur­ren­cy news plat­form Coin Crunch India is con­sid­er­ing lim­it­ing cryp­to invest­ments to 5% of his port­fo­lio if not com­plete­ly shun­ning the asset class in the next finan­cial year begin­ning April 1. About 20% of his port­fo­lio was invest­ed in cryp­tocur­ren­cies in the cur­rent finan­cial year end­ing March 31. “It makes no sense to park my mon­ey there if I can’t take it out with­out pay­ing hefty taxes.”

Come April, Sanghvi plans to rejig his port­fo­lio with stocks and mutu­al funds mak­ing up for one-fourth of invest­ments from 10% now. Reduc­ing his cryp­to expo­sure makes sense “main­ly because of the uncer­tain­ty, exces­sive tax­a­tion and scruti­ny, and the sur­prise nature of these things,” Sanghvi told Forkast.

Some are even offload­ing their cryp­to invest­ments for the first time in order to have a fresh start from April 1. 

Take for exam­ple 24-year-old Neel Kukreti, a YouTu­ber who posts cryp­to edu­ca­tion­al videos on his chan­nel. An investor in cryp­tocur­ren­cies since 2018, he told Forkast he sold off all his cryp­to invest­ments this month. That enabled Kukreti to book prof­its by pay­ing about 20% cap­i­tal gains tax for the cur­rent finan­cial year instead of more than 30% next year.

This was the first time he sold off his cryp­to assets, Kukreti said. 

“I saw the rise in cryp­tocur­ren­cies and the inter­est around it,” Kukreti told Forkast. “Cryp­to seemed the most promis­ing, that’s why I thought of tak­ing a leap of faith and get­ting into it.” 

“Next finan­cial year, I am going to dras­ti­cal­ly reduce my cryp­to trad­ing fre­quen­cy so I don’t lose cap­i­tal by pay­ing TDS on every trans­ac­tion,” Kukreti said, refer­ring to the Indi­an acronym for tax-deduct­ed-at-source. “I will also reduce my cryp­to expo­sure and shift my trad­ing to stocks mostly.”

Kukreti still aims to invest about 25% of his port­fo­lio in cryp­to from 60% before the sell off, he told Forkast.

Experts say India would have been bet­ter off start­ing with a low­er rate of tax­a­tion for a still nascent invest­ment class. This would have helped address the ris­ing fis­cal deficit despite the country’s econ­o­my mov­ing towards nor­mal­iza­tion post COVID-relat­ed lockdowns. 

India’s fis­cal deficit — the dif­fer­ence between total rev­enue and total expen­di­ture of the gov­ern­ment — is pro­ject­ed at 6.9% for the fis­cal year that ends in March 2022, high­er than pre­vi­ous­ly estimated. 

No won­der the gov­ern­ment has been crack­ing the whip by send­ing out tax demands to investors who made prof­its from cryp­to trad­ing as far back as 2017. Accord­ing to the demands seen by Forkast, investors have been asked to explain the dif­fer­ence between income declared to local tax author­i­ties and the invest­ments made in cryptocurrencies.

Even the big fish haven’t been spared. 

Bol­ly­wood super­star and Indi­an icon Amitabh Bachchan report­ed­ly paid about US$130,000 (about 10 mil­lion Indi­an rupees) in goods and ser­vices tax (GST) towards the sale of non-fun­gi­ble-tokens (NFT) in Novem­ber of last year. Exchanges are also in the tax department’s crosshairs. The Cen­tral Goods and Ser­vices Tax author­i­ty said on Mon­day that it col­lect­ed over US$10 mil­lion from 11 cryp­to exchanges accused of evad­ing GST.

See relat­ed arti­cle:  Bol­ly­wood megas­tar Amitabh Bachchan ponies up tax on NFT sale

No sur­prise then that India’s young and not so rel­a­tive­ly well-heeled crop aren’t too enthu­si­as­tic any­more about invest­ing in dig­i­tal assets. 

“I think brave young peo­ple look­ing to explore this world would rather invest in oth­er assets like com­modi­ties or stocks, where the tax treat­ment is less dra­con­ian,” said finan­cial mar­kets expert Pradeep Goop­tu. “Cryp­tocur­ren­cy in India has sud­den­ly become like an unin­sured home or car — if you suf­fer a loss, it’s gone for good.”

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