How Budget 2022 delivered a tax body blow to the middle-class cryptocurrency investor

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Sidharth Sogani

When the finance minister started speaking about cryptocurrencies, there was an acceptance that there was a phenomenal increase in the transaction volumes. And she quickly followed it up with the expression that a scheme was needed to tax them. This was clearly, a positive sign because that would provide clarity to the investors and multiple stakeholders in the ecosystem. In addition, it was also, presumably, an indication of things to come in the much-awaited Bill in the monsoon season. Interestingly, in the Budget papers too, cryptocurrencies have been mentioned as virtual digital assets, indicating that the proposed Bill will consider it as an asset or a commodity and not as a currency or legal fiat.

Heavy taxation 

But then, came the body blow – a straight 30 percent flat tax rate was proposed. And not only that but the number of other conditions that were included in it. There are many implications of this flat tax rate. For one, irrespective of the income slab, one will have to pay 30 percent on all the gains from cryptocurrencies/virtual currencies, as one calls it. What is important here to consider is that a tax like this, encompassing all taxpayers, seems quite impractical. Simply because the majority of the population does not pay any tax. They come under the tax-free slab or pay rates of 10 percent or 20 percent. In other words, the Union Budget is making cryptocurrencies unviable, as well as unattractive for the middle class, who wish to make some extra money by taking that extra bit of risk.

Also read: Explained: How cryptocurrencies will be taxed after Budget 2022

In addition, the high rate of taxation ensures that only the upper-middle-class or the rich can take this risk. Globally, things are quite different. For example, in Japan, this income from cryptocurrencies comes under miscellaneous income. And the tax rate is a function of the overall income of the taxpayer, the highest being 55  percent in comparison to stocks that are taxed at a peak of 20 percent. In Korea, the model is based on profits. That is, the tax rate is 20 percent on profits above $2,105. In the USA, which is still to regulate cryptocurrencies, the tax rate is between 10 percent and 37 percent on short-term capital gains and 10 percent-20 percent for long-term capital gains. In Germany, the tax is paid as per the income slab of the citizen, regardless of the source of income. Yes, while it is true that most countries are still coming to terms with the way they want to tax the profits from investments in cryptocurrencies, most are looking at a model, based on slabs rather than imposing a flat tax rate.

No setting off losses

But that’s not all. The Union Budget’s proposal that losses in cryptocurrencies won’t be allowed to set off makes things more difficult. Basically, it means that an investor cannot adjust the losses or profits of crypto with any other income or losses in your current financial year. And you cannot carry over the losses to the next year. That means that if the crypto market (very volatile) crashes on March 31, you will have to bear the losses in the current year.

Also, the Union Budget’s proposal that the gift income will be a liability on the hands of the recipient is somewhat incomprehensible. Let’s understand this – if somebody makes a transfer to your crypto wallet, there is no way to decline it, if the deposit address is known to the payer. It can potentially be used to play mischief on someone because he/she is not in a position to decline a transfer. This proposal, in effect, means that investors are being discouraged from even having these wallets due to the fear of falling into the wrong side of the tax department.

But that’s not all. The Union Budget has chosen to take an extremely harsh step by imposing a 1 percent TDS (tax-deductible at source) for each transaction. Here are some practical reasons. In a decentralized ecosystem, there is a good chance that a single investor may have several wallets. It is akin to having one stock market investor having several demat accounts. So, to charge 1 percent on each transaction, if one is moving cryptocurrencies from one wallet to another is draconian. A similar transaction between two bank or demat accounts would not attract any TDS. What is more significant is the 1 percent TDS on non-fungible tokens or NFTs, which are some very high-value digital assets and lead to an extremely high amount of taxation. 

So, the bottom line. A sunrise sector, which has the potential to attract foreign direct investment and improve employability, finds itself under a massive tax threat.

Lets’ do the simple math. A 30 percent flat tax rate + 1 percent TDS on every transaction + 18 percent GST on brokerage/service fee + inability to set off losses. This is more than a deterrent. And 400 million Indian investors in cryptocurrencies, with over Rs 4-5 lakh crore investments, would be a worried lot.

(The writer's opinions are personal and do not represent CREBACO Global in any way. Sogani is CEO at CREBACO Global) 

Next article (coming soon): Will high taxation mean a lost opportunity for India?