Moneycontrol Pro Panorama | Tax proposal deals a deadly blow to crypto trading

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The Budget 2022 speech was the shortest delivered by the Finance Minister Nirmala Sitharaman, but it did not lack punch, at least for some sections of the market. Indian stocks continue to trade higher today as well. The Sensex is up more than 1 percent at today’s close.

Markets are discounting the increased capital expenditure outlay without pausing to check the implementation record. But that is the nature of the beast — it reacts to expectations rather than reality. This is why finance ministers, over the years, have spiced their budget speeches and pushed all the negative stuff under the carpet in the fine print of the Finance Bill.

Experts rely on a reading of the Finance Bill before passing a judgment on the Budget. There are always some important discoveries in the bill that the finance ministers do not mention in the speech or mention in passing and the message takes time to reach home.

This year too, there are some. Take, for instance, the provisions for the taxation of digital assets. The finance minister has proposed a 30 percent tax on income from the transfer of any virtual assets and a TDS of 1 percent on every transaction. Further, no deductions, including losses on some transactions, are allowed. While the government intends to track the flow of investment in these assets, these provisions can kill trading in these assets.

Crypto traders, like those in the equity markets, trade for short-term returns. They make money by trading frequently and keeping their profits bigger and booking their losses early.

Suppose in 10 trades, a trader makes a gross profit of Rs 100,000 and a loss of Rs 50,000, thus posting a net profit of Rs 50,000 — if this was trading in crypto assets, the trader will have to pay a tax Rs 30,000 (at 30 percent) on this gross profit, leaving Rs 20,000 as profit on his table. In speculative trading in the equity markets, his tax would be Rs 15,000, which is 30 percent on the net profit of Rs 50,000, leaving him Rs 35,000.

The bigger problem is TDS. On every trade, he has to incur a cost of 1 percent as TDS. In 10 trades, it will be equivalent to 10 percent of the money deployed to trade. Normally a very good short-term trader makes anywhere between 3-5 percent on his capital. Assuming an optimistic 10 percent return on investment, the trader will deploy upwards of Rs 10 lakh per trade to generate a net profit of Rs 50,000.

A TDS of 1 percent on each trade of Rs 10 lakh each for 10 trades would add up to Rs 1 lakh.

In the end, after incurring the taxes mentioned in the Budget, the trader would be down by Rs 50,000 and the government would have made Rs 130,000 – Rs 100,000 from TDS and Rs 30,000 from capital gains.

Crypto traders are not happy with what they claim is a high 30 percent tax on profit, but the bigger problem for them is not allowing losses to be set off against the profits and the slow killer, TDS. To add to the cost is the charge of 18 percent GST on the brokerage.

The government’s provision of taxing digital assets will kill short-term trading in cryptocurrencies. The exchanges that allow such trading will be the biggest losers in the long term.

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Shishir Asthana
Moneycontrol Pro