Will WazirX’s Nischal Shetty, ex-Zebpay CEO Avinash Shekhar’s crypto futures fall outside income tax ambit?

WazirX founder Nischal Shetty and former CEO of Zebpay Avinash Shekhar have teamed up to launch a futures exchange denominated in rupees for crypto asset traders. The newly launched platform, Pi42, registered in India, will enable Indian crypto owners to participate in derivative trading with 10-20x leverage using the local currency. The exchange claims that these derivatives will fall outside the income tax ambit, with no TDS, no flat 30% tax, and will have the ability to set off losses. According to Pi42, investors enter into contracts to profit from crypto price movements without holding the underlying assets. These contracts are designed as perpetual future contracts with no expiration date.

Futures contracts allow traders to speculate on future price movements of the underlying asset without owning it. Pi42 argues that since there is no ownership of underlying asset, it does not qualify as a Virtual Digital Asset under Section 2(47A) of the Income Tax Act. 

Section 2(47A) defines a virtual digital asset as ‘any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account including its use in any financial transaction or investment, but not limited to investment scheme; and can be transferred, stored, or traded electronically.’

The blog of Pi42 states, “In the case of a crypto derivative, an investor enters into a contract to gain from the price movements in crypto without holding the underlying crypto. Thus, there is no generation of information, code, number, or token as a result of the execution of a crypto asset derivative instrument. In other words, information, code, or number or token does not exist in this transaction. Therefore, a crypto derivative shall not qualify as a VDA u/s. 2(47A) of the Act and thus, shall be outside the purview of Section 115BBH of the Act.”

However, experts caution that while Pi42’s claims may offer immediate tax benefits, the regulatory landscape surrounding cryptocurrency taxation may change. Tax authorities are responsive to developments in the cryptocurrency space, suggesting that these benefits may not be sustainable in the long term.

Here is what experts say about crypto contracts and their taxability: 

 Suresh Surana, Founder, RSM India 

In our view, Crypto derivatives may not be treated as Virtual Digital Assets (VDAs) as it is not accompanied with a promise or representation of having inherent value, or functions as a store of value or a unit of account and the settlement is done by means other than actual delivery. However, it is pertinent to note that such opinion is formed by bare reading of the section 2(47A) which defines VDA and it is subject to any clarification which may be issued by the Income Tax Department.

 Further, it seems that such crypto derivatives income would fall within the purview of “income from speculative business” and would not be in the nature of “income from normal business”. There is a specific exemption u/s 43(5), wherein certain transactions would not fall within the purview of “speculative transaction” such as income from eligible transaction in respect of trading in specified derivatives carried out on a recognized stock exchange. It seems that crypto derivative may not fall within the purview of such exclusion and may be treated to be in the of speculative transaction.

 As taxation regulations for VDA has been recently brought in and as this space has been closely monitored by the regulators, we need to wait and watch for any clarification which the government may issue in this respect.

Sathvik Vishwanath, Co-Founder & CEO, Unocoin 

“The Pi42 platform’s claim of no 30% tax, no TDS and loss netting due to its derivative nature highlights the potential benefits for cryptocurrency traders. However, the accuracy of these claims depends on the complex and evolving tax regulatory environment governing cryptocurrency derivatives. Tax authorities are likely to closely monitor developments in the sector and, if irregularities or loopholes enabling tax avoidance are identified, adjustments to existing policies may follow. This could include clarifying tax treatment, closing loopholes or introducing specific provisions tailored to cryptocurrency derivatives.

While Pi42’s claims may provide immediate tax benefits, the regulatory landscape surrounding cryptocurrency taxation may change. Tax authorities are alert and responsive to developments in the cryptocurrency space, suggesting that these benefits may not be sustainable in the long term. Therefore, investors and traders should approach such claims with caution and seek professional tax advice to ensure compliance with applicable tax laws and regulations. In summary, while the Pi42 platform may currently offer advantages, the changing nature of cryptocurrency taxation underscores the importance of being informed and adaptable to potential regulatory changes.

Amit Singhania, Founder, Areete Law Offices

Crypto derivates are unique instruments and it appears that they will not be covered within the definition of Virtual Digital Assets and accordingly will not under Crypto taxation regime. Consequently, flat rate of 30% tax, TDS and restricted on set off of losses, may not be applicable.