Will crypto asset investors get a reprieve in Budget 2024?

Industry experts believe that now is time for the government to treat the crypto industry on par with other industries.

Crypto asset investors are hoping for a reduction in transaction tax, allowing setting-off of losses and treating capital gains from crypto assets the same as in other income sources from the upcoming Union budget.

Budget 2022-23 had brought in regulations mandating that gains arising from virtual digital assets (VDAs) or crypto assets be taxed at a flat rate of 30 percent irrespective of the individual’s income tax slab rate. In addition, a 1 percent tax deducted at source (TDS) was introduced on every transfer of such assets.

However, even as these laws were brought in, the government didn’t address the legality of such assets, which has been a long-standing demand of the industry.

Lower tax incidence

In comparison to the higher rate of capital gains tax that the crypto segment faces, selling listed securities such as shares and units of equity-oriented mutual funds (where equity exposure is above 65 percent of the assets) within a year invites a short-term capital gains (STCG) tax of 15 percent. The long-term capital gains (LTCG) tax kicks in if the securities are sold after a year of purchase, attracting a tax of 10 percent on gains of over Rs 1 lakh in a year.

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Ashish Singhal, co-founder of cryptocurrency app CoinSwitch, is of the opinion that to capitalise on India’s Web3 opportunity, the government must in the budget reconsider the tax treatment on VDAs.

“The flat rate of 30 percent applicable on income from the transfer of VDAs needs to be re-examined to ensure parity with other tech-enabled sectors. Additionally, the threshold of Rs 10,000 or Rs 50,000 can also be looked at. Most crypto sellers (mainly individuals) are in the low-income bracket. Increasing the threshold will reduce the administrative burden on the tax department in processing refunds,” said Singhal.

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Parity with other assets

A key benefit of investing in traditional assets such as stocks, gold and bonds is the facility to set off losses in an asset against gains in another during that particular year and carry forward unadjusted losses for future adjustments. However, the losses from one crypto asset can’t be adjusted against gains from another, and no carry-forward of losses is allowed.

“We have requested the finance ministry to allow the setting-off of losses on one VDA transaction against profits on other transactions. We advocated for the government to consider income from the transfer of assets on par with other income sources,” said Dilip Chenoy, chairman, Bharat Web3 Association, an industry body representing India's VDA sector.

TDS on crypto transfers

The 1 percent TDS over and above the 30 percent tax on crypto gains that was introduced in Budget 2022-23 was to track crypto assets’ movement.

During the recent pre-budget consultations, the Bharat Web3 Association had suggested the government reduce the transaction tax from its current 1 percent to 0.01 percent.

“The Indian VDA market has seen a sharp decline in business over the past two years since the 1 percent TDS and capital gains tax were implemented. The 1 percent TDS has significantly impacted our business. We expect the upcoming budget to address our grievances and reduce the TDS and capital gains taxes on VDA transactions to reasonable levels, allowing us a level playing field to function and prosper,” said Shivam Thakral, chief executive officer, BuyUcoin, a cryptocurrency exchange.

Singhal says that a lower TDS will bring the majority of VDA transactions within the tax oversight mechanism, improve tax compliance and prevent capital flight.

Regulatory clarity

According to crypto industry experts, a lack of clear regulations has forced Web3 startups, including crypto firms, and entrepreneurs to move to more VDA-friendly jurisdictions such as Dubai.

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“VDA and Web3 businesses are moving offshore. Global venture funds are shy of entering the Indian market, depriving local businesses of funding opportunities. VDA investors are migrating to unregulated offshore exchanges with no protection of the law,” said Thakral.

Crypto players have urged the government to implement what they call “clearer, industry-friendly regulations, and tax reforms” that they believe would allow the sector to “flourish and create new opportunities and revenue streams”.

Industry experts believe that the introduction of the crypto tax was a positive step that showcased India’s willingness to adopt a progressive approach, but now is time for the government to treat the crypto industry on par with other industries.