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Sumit Gupta, co-founder and CEO of Indian crypto exchange CoinDCX, recently spoke with crypto.news in an exclusive interview, discussing how India's crypto tax policies have impacted the industry.
The introduction of cryptocurrency taxes in the Union Budget 2022 was a watershed moment for the crypto economy in India. Under section 2 (47A) of the Income Tax Act, 1961, digital currencies were labeled as virtual digital assets (VDA).
A sector that was once mired in ambiguity has been injected with a sense of legitimacy and set on a clear regulatory path.
However, regulatory clarity came with some burdens of its own. A 30% tax rate, combined with an additional 1% TDS on transactions, soon became a deterrent for retail traders. Trading volumes plummeted, driving the crypto economy underground or to more tax-friendly shores.
However, industry experts like Gupta are in favor of the formal recognition and structured environment of cryptocurrencies that exist now.
Although it has been more than a year since the introduction of this new framework, confusion and misconceptions persist among new and experienced investors. The average investor is still grappling with the complexities of reporting and calculating taxes on their transactions, particularly with respect to gambling, mining, and using cryptocurrencies in everyday business transactions.
Gupta seeks to clarify some of the more complex aspects of cryptocurrency taxes, addressing common misconceptions and providing a clearer understanding of the regulations.
Can you explain the different tax treatments for profits derived from cryptocurrency trading, mining and staking and how these rules affect investors? For example, how does the flat 30% tax on trading and mining compare to the flat income tax rate on staking rewards?
Profits from cryptocurrency trading and mining are subject to a flat 30% tax, with no deductions or loss offsets allowed. However, betting income is taxed at the individual's income tax rate, potentially offering a lower rate. The Web3 sector, 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. The high tax rate and non-authorization of loss offsets discourage entrepreneurship, innovation, job creation and foreign investment, potentially driving talent and capital abroad. Adjusting these tax policies could encourage growth and innovation within the industry.
What are the most common misconceptions you have encountered about cryptocurrency taxes and how can investors avoid these pitfalls?
It is crucial to dispel the misconception that all crypto activities are taxed at a flat rate of 30% or that staking rewards are only taxable at the time of sale. Staking rewards are taxable upon receipt based on market value. Additionally, trading 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 tax amounts in real time for all crypto transactions, including nfts and DeFi investments.
How do you foresee potential changes to global cryptocurrency regulations, particularly those discussed at the G20 meetings, influencing India's stance on both general cryptocurrency regulations and taxation?
The G20 discussions, especially those held in India, provided a strong platform to shape global crypto regulations. These wide-ranging consultations are crucial to developing comprehensive frameworks that can be adapted by each country. For India, these discussions offer a blueprint for achieving regulatory clarity, ensuring a balanced approach that benefits all stakeholders. The inclusion of Virtual Digital Asset (VDA) transactions under the Prevention of Money Laundering Act (PMLA) is an example of such regulatory clarity, allowing policymakers to monitor the crypto space and discourage illicit activities. effectively.
On that basis, how has the inclusion of cryptocurrency transactions under the Prevention of Money Laundering Act (PMLA) affected the compliance and operational practices of the cryptocurrency industry in India?
The inclusion of VDA transactions has been a win-win situation as it provides policymakers with a platform for oversight and discourages illicit actors. This regulation requires strict compliance with KYC (Know Your Customer) and AML (Anti-Money Laundering) procedures, leading to greater transparency and lower risk of illicit activities. The Bharat Web3 Association published a case study detailing the implementation of these regulations, showing the active support of the industry and the critical role played by India's Financial Intelligence Unit (FIU).
Considering these regulatory changes, what are the specific challenges faced by high-frequency traders in India due to the 1% tax deducted at source (TDS) rule and what strategies can be employed to mitigate these issues?
The 1% TDS rule poses significant challenges for traders in India, mainly by reducing liquidity and pushing users towards offshore exchanges that do not deduct TDS. This has led to a massive shift of over 95% of trading volumes to exchanges outside India, which has negatively affected domestic players. To mitigate these issues, the industry is advocating for a reduction in TDS to 0.01%, which would help maintain government oversight while keeping the market attractive to investors. It also greatly reduced the liquidity of high-frequency traders. However, due to CoinDCX's product and its reputation for compliant businesses, we have seen some positive movements and users returning to us since the FIU-India blocked the non-compliant offshore exchange. However, a large portion of migrated users still remain on non-compliant exchanges and face exposure to illicit actors.
Do you think there is a chance that the government will reduce the tax burden on cryptocurrencies?
The industry has been advocating for a reduction in TDS to 0.01%, which would maintain the government's objective of tracking financial flows while making the market more attractive to investors. We are hopeful that the government will consider this request to reduce the tax burden on crypto transactions, particularly 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 and ensure compliance?
Balancing innovation with tax compliance requires a nuanced approach, where regulations are clear and support technological advances, while ensuring robust oversight to prevent misuse. Engaging with industry stakeholders and studying global best practices can help create a balanced framework. We also recently published a white paper in which we studied global and Indian economic literature and it points to the same result.
