New crypto exchange Pi42 avoids flat 30% tax -- but is it safe?

Pi42 claims to be India’s first crypto-INR futures exchange.

At a time when crypto volumes have plummeted in India owing to stiff taxation, Pi42, a crypto-INR futures exchange, offers benefits such as zero tax deducted at source (TDS), offset of losses, and lower taxation.

Pi42 has been launched by WazirX founder Nischal Shetty and former Zebpay Chief Executive Avinash Shekhar.

The launch of the exchange has come on the heels of the 2024 interim budget, where the government didn’t touch upon crypto assets.

The product

Pi42 claims to be India’s first crypto-INR futures exchange. There are existing exchanges such as WazirX and Zebpay, that offer spot crypto trading and investing.

In contrast to spot trading, where purchasing one bitcoin might demand a significant investment, futures contracts enable traders to initiate positions at a fraction of the cost, and speculate on future price movements without actually owning the assets.

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There are two kinds of futures products: one with an expiry date, and perpetual futures, where there is no expiry date.

Avinash Shekhar, Co-Founder and CEO, Pi42, says that Indians have already been trading in perpetual futures. “But all those contracts are Tether (USDT) denominated perpetual futures. For example, there are BTC-USDT pairs, and ETH-USDT pairs. What we have come up with is INR-denominated crypto futures, which we believe Indian customers would be able to understand and relate to better. Investors can deposit INR and place long or short-term trades. This product will be priced in rupees,” he explained.

Why perpetual futures?

Globally as well as in India, perpetual futures are becoming popular, as they give investors the ability to do leverage trading. Further, the liquidity and volume is very high in the crypto perpetual futures market.

Since they are perpetual contracts and there’s no expiration date, they’re a good way to deploy long-term trading strategies. As per Shekhar, this is a key reason why Pi42 is offering perpetual futures, and there will be a correlation between the price of the crypto asset and the perpetual futures contract.

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The exchange is currently offering five token pairs based on Bitcoin, Ether, Solana, MATIC, and Ripple. Retail investors will be able to access the crypto market with a leverage of up to 20 times, and no expiry dates.

The exchange currently charges a trading fee of 0.1% for takers and 0.05% for makers, but plans to reduce trading fees for accounts with higher volumes. Makers create buy / sell orders that aren't carried out immediately. Those that buy or sell instantly are called takers.

Shekhar estimates that Indian spot crypto exchanges are doing $300 to $500 million a month in volumes today.

“If you take the peak of the crypto market, which was in the second half of 2021, Indian exchanges were doing around $70 billion a month. With bitcoin spot exchange-traded funds (ETFs) getting launched and a potential bull run in the crypto market, the spot volume will increase. We aim to do more than five times the spot volume, which is usually the trend globally,” he said.

Managing risk

Perpetual futures contracts continue indefinitely, until either party decides to close the position. Per Shekhar, since perpetual futures is a leverage trade, the exchange may be forced to liquidate a position if losses balloon in an account.

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Also, in future, they plan to narrow the leverage margin from 20 times, if there is higher volatility. There is a minimum contract size for the pairs, which is in the range of Rs 8,000-10,000.

The taxation curveball

The Finance Act, 2022, introduced section 115 BBH, which states that gains arising out of crypto assets or virtual digital assets (VDAs) will be taxed at a flat rate of 30 percent. Also, the losses from one crypto can’t be adjusted against gains from another, and no carry forward of losses is allowed.

Further, a 1 percent TDS is to be charged on each transfer of crypto assets, which reduces your principal.

Naveen Wadhwa, Vice President, Research & Advisory, Taxmann, says, “Crypto futures aren't included in the definition of VDAs, which covers crypto assets like Bitcoin or Ether, non-fungible tokens (NFTs), and ‘notified assets’. However, ‘notified assets’ have not been specified by the government. Since crypto derivatives are not crypto assets, they are taxed as futures products, and crypto taxation does not apply to them.”

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Therefore, in crypto futures, gains are taxed per your normal tax slab, and losses can be adjusted for the next four years. However, keep in mind that if investors choose to take delivery of the contract, then the gains would be taxed at 30 percent.

“Income tax is a highly technical law. We are not the first exchange that is offering derivatives in India. The new thing that we are doing is that we are offering a cypto-INR pair. There is no tax avoidance. We are following current taxation laws,” said Shekhar.

Taxation risks

Tax experts Moneycontrol talked to said the government can look to add crypto derivatives under `notified assets’, which would bring them under Section 2 (47A) of the Income Tax Act, and crypto taxation would be applicable to them. However, the classification change is unlikely to be implemented retrospectively, according to the experts.

“The current crypto taxation, from the industry’s point of view, is high and unfair. We are trying to convince the government to reduce these taxes because they are hurting the industry.
We believe that slowly the government will reduce or optimise crypto taxation,” said Shekhar.

Investment risk

Investing in the futures market can be lucrative, but it also comes with certain risks. In a study conducted by SEBI last year, it was revealed that nine out of 10 equity traders incurred losses, with an average loss of around Rs 1.10 lakh. There is a risk of losing all your principal in the futures market.

Bear in mind that while crypto investing is unregulated in India, the futures market in crypto exponentially increases the risk. While leverage can amplify returns, it also magnifies losses, and futures prices can be highly volatile. Even a small price movement can lead to substantial losses.

Further, some futures contracts may lack sufficient trading volume, leading to lower liquidity. This can result in wider bid-ask spreads and may make it difficult for traders to execute trades at desired prices.

Before venturing into futures trading, investors need to do thorough research and comprehend the associated risks. Seeking professional financial advice is recommended.