Regulation
CoinDCX CEO Clarifies India’s Cryptocurrency Tax Regulations and Their Impact
Sumit Gupta, co-founder and CEO of Indian cryptocurrency exchange CoinDCX, recently spoke with crypto.news in an exclusive interview, discussing how India’s cryptocurrency tax policies have affected the industry.
The introduction of cryptocurrency taxes in the Union Budget 2022 was a watershed moment for the cryptocurrency economy in India. Under section 2 (47A) of the Income-tax Act, 1961, digital currencies were labeled as virtual digital assets (VDAs).
An industry that was once mired in ambiguity has been infused with a sense of legitimacy and charted towards a clear regulatory path.
However, regulatory clarity has come with some burdens of its own. A tax rate of 30%, coupled with an additional 1% TDS on transactions, soon became a deterrent for retail traders. Volumes exchanged crumbled and spearheaded the cryptocurrency economy underground or towards more advantageous places from a tax point of view.
However, industry experts appreciate Gupta they are all for formal recognition and the structured cryptocurrency environment that now exists.
Even though it’s been over a year since introduction of this new framework, confusion and a proliferation of misconceptions remain among both new and experienced investors. The everyday investor still grapples with the complexities of reporting and calculating taxes on their transactions, particularly as it relates to staking, mining and the use of cryptocurrencies in everyday business transactions.
Gupta seeks to clarify some of the more complex aspects of cryptocurrency taxation, addressing common misconceptions and providing a clearer understanding of the regulations.
Can you explain the different tax treatments for profits from trading, mining and staking cryptocurrencies and how these rules affect investors? For example, how does the 30% flat tax on trading and mining compare to the income tax rate applied to staking rewards?
Profits from cryptocurrency trading and mining are subject to a flat 30% tax, with no deductions or loss offsets allowed. However, wagering income is taxed at the individual’s income tax rate, potentially offering a lower rate. The Web3 industry, including CoinDCX, is urging the government to reduce the 30% tax rate on virtual digital assets (VDA) to align with other asset classes, especially securities. High tax rates and failure to offset losses discourage entrepreneurship, innovation, job creation and foreign investment, potentially driving talent and capital abroad. Adjusting these tax policies could foster growth and innovation within the industry.
What are the most common misconceptions you’ve encountered about cryptocurrency taxes, and how can investors avoid these pitfalls?
It is crucial to dispel the misconception that all crypto assets are taxed at a flat rate of 30% or that staking rewards are only taxable upon sale. Staking rewards are taxable upon receipt, based on market value. Additionally, business losses cannot offset other types of income. Investors should maintain detailed records and seek professional tax advice for effective navigation and compliance. CoinDCX has partnered with KoinX to help users file cryptocurrency taxes. This platform allows users to track tax calculations, connect multiple exchanges and wallets, and view real-time tax amounts for all crypto transactions, including NFTs and DeFi investments.
How do you foresee potential changes in global cryptocurrency regulations, particularly those discussed in G20 meetings, that will impact India’s position on both general cryptocurrency regulations and taxation?
The G20 debates, especially those held in India, have provided a solid platform for shaping global regulations on cryptocurrencies. Such wide-ranging consultations are crucial for developing comprehensive frameworks that can be adapted by individual countries. For India, these discussions offer a model of regulatory clarity, ensuring a balanced approach that benefits all stakeholders. The inclusion of Virtual Digital Asset (VDA) transactions in the Prevention of Money Laundering Act (PMLA) is an example of such regulatory clarity, allowing policymakers to oversee the crypto space and effectively deter illicit activities.
With this in mind, how has the inclusion of cryptocurrency transactions in the Prevention of Money Laundering Act (PMLA) impacted the compliance and operational practices of the cryptocurrency industry in India?
The inclusion of VDA transactions has proven to be a win-win situation as it gives policy makers a platform for oversight and deters illicit actors. This regulation requires strict adherence to KYC (Know Your Customer) and AML (Anti-Money Laundering) procedures, leading to greater transparency and a reduction in the risk of illicit activities. The Bharat Web3 Association has published a case study detailing the implementation of these regulations, demonstrating active industry support and the key role played by India’s Financial Intelligence Unit (FIU).
Given these regulatory changes, what are the specific challenges faced by high-frequency traders in India due to the 1% tax deduction at source (TDS) rule and what strategies can be employed to mitigate these issues?
The 1% TDS rule poses significant challenges to traders in India, primarily by reducing liquidity and pushing users to offshore exchanges that do not deduct TDS. This has led to a massive shift of over 95% of trading volumes to exchanges outside India, negatively impacting domestic traders. To mitigate these issues, the industry supports a reduction in TDS to 0.01%, which would help maintain government oversight while keeping the market attractive to investors. It also significantly reduced liquidity for high-frequency traders. However, due to the product and CoinDCX’s reputation for compliant businesses, we have seen some positive movement and users coming back to us since FIU-India blocked the non-compliant offshore exchange. However, a large chunk of migrated users still remain with non-compliant exchanges and face exposure to illicit actors.
Do you think there is a possibility that the government will reduce the tax burden on cryptocurrencies?
The industry supports a reduction in TDS to 0.01%, which would maintain the government’s objective of monitoring financial flows while making the market more attractive to investors. We hope that the government will consider this request to reduce the tax burden on crypto transactions, especially the TDS rate, to foster a more conducive environment for innovation and investment.
Finally, if it were up to you, what approach would you take to balance innovation while ensuring compliance?
Finding a balance between innovation and tax compliance requires a nuanced approach, where regulations are clear and support technological advances while ensuring robust oversight to prevent abuse. Engaging industry stakeholders and studying global best practices can help create a balanced picture. We have also recently published a whitepaper, in which we have studied global and Indian economic literature, and it indicates the same result.