Crypto Taxation Impact on Investors & Crypto Exchange Platforms

Crypto tax laws have been effective from April 1^st in India but its effect had started appearing the day Loksabha passes the bill.

The government of India imposed a 30% Tax on the profit gained from crypto transfer (sell, exchange, and relinquishment) and 1 % TDS on every transaction related to cryptocurrency and other virtual digital assets.

Not only the crypto community but also some members of Loksabha have criticized the government for imposing such high tax rates on the exchange of virtual digital assets.

Crypto India tweeted that India crypto exchanges saw an approximately 50% volume decline after new crypto rules became applicable.

Co-founder of crypto India Aditya Singh has also shared some screenshots on tweeter representing the drop in trading volume.

Crypto industry is still in the emergence phase in India.

In the beginning, only the techies and big payers were doing the investments in this industry. But now 15 to 20 million Indian retailers have also become part of this community and doing hefty investments in cryptocurrency.

People are doing experiments to figure out the potential growth of the industry.

Now that the government has applied taxes on crypto, experts fear that this will discourage investors and traders; and will also stifle the growth of the crypto industry in India.

Impact of Crypto Taxation on Crypto Exchange Platforms

After the new crypto tax law kicks in, many crypto exchange platforms reported a sudden drop in trading volume. But they are more concerned about the 1% TDS law.

Why?

Let’s take an example –

Consider that you have bought a Bitcoin and transferred it to your digital wallet. And then purchased a non-fungible token (NFT) using that Bitcoin.

First Transaction – buying a cryptocurrency

Second transaction – transferring cryptocurrency into the digital wallet

Third transaction – purchasing NFT from that cryptocurrency

Total Number of Transactions = 3

You will have to pay 1% TDS in each transaction phase (1^st, 2^nd, 3^rd) ie. 3% TDS will be applicable on this transaction.

Sounding difficult? Right!!

After the 1% TDS law comes into an effect, crypto exchange platforms may notice a greater impact on the crypto trading volumes.

Some expert says that buying crypto will become quite expensive in India after this law kicks in.

India’s first crypto exchange Unicorn CoinDCX Sumit Gupta told Blockworks that,

“The onerous tax provisions are a challenge for the crypto industry. A flat 30% tax rate will certainly stifle growth and we have already seen many crypto companies leaving India.”

Most of the big giants are also looking forward to moving offshore where they can work in more crypto-friendly jurisdictions.

Initially, India had a lot of uncertainty about the crypto regulatory framework, and now heavy crypto tax making it difficult for investors to launch crypto exchange platforms here.

Crypto industry is a completely virtual world and it can be managed from anywhere. This is the main reason investors are looking forward to setting up in countries like Singapore, the USA, Dubai, Mauritius, and Thailand which offers a way positive outlook required for this industry to flourish. 

Impact on Small Retailers Investors

The day crypto tax bill passed in the parliament; Twitter was flooded with queries and concerns by the investors.

Some of them were confused due to a lack of clarity on new regulations while others were figuring out the ways to deal with this new crisis.

These crypto tax laws have majorly affected the small retail investors who come under lower tax brackets or have been relying on lower capital gains tax rates.

Many crypto experts had suggested to small investors/retailers to sell crypto before April 1^st and set off their losses in case of loss. Because as per the new crypto Tax law; investors can not set off their one crypto loss against the profit gained from another crypto asset.

As a result, many small retail investors offloaded their portfolios before 31^st March.

While some investors decided to put their portfolios on hold in the hope that one day taxes will get lowered. No sale, no profit, no tax.

Other big investors decided to continue trading.

Now Indian crypto world is left with people who can afford to pay 30% taxes on gains and people who can hold their portfolios as long as needed. 

How Crypto Taxation can hurt the Indian Economic System?

While speaking at the business today conclave, CoinDCX CEO Sumit Gupta said that the current tax provisions can turn away both the investors and developers away to other countries.”

Nischal Shetty the founder of WazirX has also tweeted that the government of India needs to rethink the applied crypto tax policy as this could negatively affect India. Such as,

• Crypto flight to foreign exchanges

• Trade without KYC

• Grey markets

• Large tax defaulters

• Large TDS refunds

One more downside is that Investors are more likely to get attracted to the decentralized cryptocurrency where the government can not track transactions.

Conclusion

Crypto industry is facing the biggest survival pressure in India due to the imposed taxes. These new laws are equally affecting the crypto exchange platforms and investors. Somewhere it will also affect the Indian economic system.  

There’s a saying “every dark cloud has a silver lining”. The government of India only imposed heavy taxes on cryptocurrency, they haven’t completely banned cryptocurrency. Therefore, maybe in the future, we could see some great initiative from the government to develop the crypto industry in India.

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