Impact Of 30% Tax On Crypto Assets A Year On, And Industry’s Expectations From Budget 2023

Crypto trade volume worth at least Rs 32,000 crore have shifted to foreign shores from Indian crypto exchanges between February and October 2022 following changes in tax legislation on crypto assets, according to a report by the New Delhi-based technology thinktank, Esya Centre.

The report says that of the three tax measures announced by the government last year, the implementation of one percent tax deduction at source (TDS) had the worst impact. Indian virtual digital asset (VDA) exchanges lost up to 81 per cent of their trading volume in the three-and-a-half month period between July 1 and October 15, 2022, when it was officially implemented.

It has also impacted the trading volume of major crypto exchanges such as WazirX, CoinDCX, Bitbns and many more, the report adds.

The Industry Viewpoint

The taxation of cryptocurrencies is in a relatively nascent stage not just in India, but across the globe, and it will evolve over a period of time. 

The specific provisions for taxing cryptocurrencies were introduced in Budget 2022. While the provisions provide clarity on many aspects, there are some areas on which the crypto industry has sought clarity. 

“There is ambiguity on whether losses from one cryptocurrency can be set off against profits from another cryptocurrency. While it is understandable that losses from crypto cannot be set-off against any other income, an inter-source set-off should be permissible, and clarifications should be issued to this effect,” says Umesh Gala, partner, Dhruva Advisors, a tax firm.

Gala says that expenditure that is incurred directly in connection with the transfer of crypto (say exchange fees, transaction charges, etc.) should be allowed as a deduction. The provisions currently permit only the cost of acquisition as an allowable deduction. 

“It is interesting to note that expenses incurred by the miner for mining of cryptocurrency, such as electricity costs, costs of sophisticated machines, etc., may not be regarded as ‘cost of acquisition’ of cryptocurrency, and consequently, no deduction may be allowed to the miner for such costs. Suitable clarifications around such issues are recommended,” he adds.

Expectations From Budget 2023

Suman Bannerjee, CIO, Hedonova, an alternative investment fund (AIF) firm investing in alternative assets, such as non-fungible tokens (NFTs), crypto and P2P lending on the cryptocurrency, says that there has to be profits made in crypto if it is to be taxed. 

The government collected just Rs 60 crore through the 1 per cent TDS and that will diminish more in 2022 given the drop in prices, he says. 

“I don’t think there will be any changes to the current crypto tax regime. I do think that there will be clarifications in cryptos’ utility as a currency, as in, it will be codified that crypto is an asset and not a currency or legal tender and the state-owned central bank digital currency (CDBC) will be a currency as well as a legal tender,” he says. 

Karan Ambwani – India Lead, dYdX Foundation contributor, says, “I expect reduction in the TDS rates, as the insights from most empirical studies on its impact on traffic, volumes and capital movement all point out that there is an effective loss because of high TDS to the exchequer and the local Web 3.0 start-up ecosystem.”