Regulation
CoinDCX CEO clarifies the rules and effects of the sector
Sumit Gupta, co-founder and CEO of CoinDCX, recently provided insights into the cryptocurrency tax regulations in India and their impact on the industry.
In an exclusive interview, Gupta highlighted the challenges and opportunities presented by the introduction of taxes on digital currencies by the Union Budget 2022, classified under section 2 (47A) of the Income-tax Act, 1961 as virtual digital assets (VDA).
Fiscal framework and its immediate effects
The Union Budget 2022 marked a turning point for the Indian crypto economy by introducing formal tax regulations on cryptocurrencies. This move brought legitimacy and a structured regulatory path to an industry previously fraught with ambiguity.
However, clarity came at a price. The 30% tax rate on trading and mining profits and the 1% tax deduction at source (TDS) on transactions have placed significant burdens on retail traders. These high taxes have led to a notable decrease in trading volumes, pushing a substantial portion of the cryptocurrency economy underground or into more tax-friendly jurisdictions.
Despite these challenges, Gupta and other industry experts support the formal recognition and structured environment provided by the new regulations. They argue that although tax rates are high, the framework offers a basis for future regulatory developments and potential adjustments.
Complexities in taxation of various crypto assets
One of the main points of confusion among investors is the different tax treatments for various crypto activities, including trading, mining, and staking. Profits from trading and mining are subject to a flat 30% tax, with no deductions or loss offsets allowed. This simple but strict tax policy contrasts with the taxation of staking rewards, which are taxed based on the individual’s income tax bracket, potentially resulting in a lower tax rate.
Gupta pointed out that the high tax rate and failure to compensate for losses for trading and mining can stifle entrepreneurship and innovation. These strong policies can direct talent and capital to more favorable environments. The Web3 industry, including CoinDCX, supports reducing the 30% tax rate on VDAs to make it comparable to other asset classes, such as stocks, to promote growth and innovation in the sector.
Misconceptions and compliance challenges
One major misconception is that all crypto assets are taxed at a flat rate of 30%. Another is that staking rewards are only taxable at the time of sale. In reality, staking rewards are taxable upon receipt based on their market value. Additionally, trading losses cannot be used to offset other types of income.
To help investors navigate these complexities, CoinDCX has partnered with KoinX, a platform that assists users in filing cryptocurrency taxes. This service 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. Keeping detailed records and seeking professional tax advice is crucial for investors to avoid pitfalls and ensure compliance.
Global regulatory influence and India’s response
Discussions held during the G20 meetings, especially those hosted by India, have been instrumental in shaping global regulations on cryptocurrencies. These consultations aim to develop comprehensive frameworks that individual countries can adapt. For India, the G20 discussions provide a model for regulatory clarity, ensuring a balanced approach that benefits all stakeholders.
A notable regulatory change in India is the inclusion of VDA transactions in the Prevention of Money Laundering Act (PMLA). This measure aims to strengthen control and discourage illicit activities. The regulation requires strict compliance with Know Your Customer (KYC) and anti-money laundering (AML) procedures, resulting in greater transparency and reduced risk of illegal activities.
Furthermore, the Bharat Web3 Association has documented the successful implementation of these regulations, highlighting the active support of the industry and the central role played by India’s Financial Intelligence Unit (FIU).
Challenges and support for tax reforms
High-frequency traders in India face challenges due to the 1% TDS rule, which reduces liquidity and pushes users to offshore exchanges that do not deduct TDS. This shift has led to over 95% of trading volumes moving to exchanges outside India, negatively impacting domestic traders. The industry supports reducing the TDS to 0.01%, which would maintain government oversight while making the market more attractive to investors.
Despite regulatory and tax burdens, CoinDCX has seen positive movement and user returns since FIU-India blocked non-compliant offshore exchanges. However, many users remain on non-compliant exchanges, exposing them to potential risks.
The cryptocurrency industry continues to hope that the government will consider reducing the tax burden on crypto transactions, especially the TDS rate. A lower tax rate would create a more conducive environment for innovation and investment, aligning the cryptocurrency market with other asset classes and supporting industry growth.