Crypto tax proposal throws up more questions than answers

In fact, the taxation announcement on virtual digital assets has created a host of problems for investors and tax experts on how to calculate their gains and taxes. One of the questions in everybody's mind is on what happens to gains made by investors in previous years – that is, will the tax be retrospective? For the crypto community, there is no other option but to wait and watch till the govt comes out with the much-anticipated Cryptocurrency Bill

Allaying the apprehensions of the investors and experts of the cryptocurrency in the country, Union Finance Minister Nirmala Sitharaman, while presenting the Union Budget for the financial year 2022-23 in Parliament, had made the all important announcement of introduction of 30 per cent taxation on income from transfer of virtual digital assets like cryptocurrencies in the country. The Finance Minister also announced that no set off will be allowed in case of losses and gifts in virtual digital assets would be taxed in the hands of the recipients. The Finance Minister also proposed that no deduction will be allowed on these gains and a TDS of 1 per cent will also be levied on payment made for transfer, above a monetary threshold.

In normal course, such a big announcement would have been a big relief to the investors and traders of cryptocurrencies as experts in the field are of the view that the introduction of taxation on transfer of cryptocurrencies by the central government is a positive step as it will give the much-awaited clarity on the way forward for the crypto investors.

But it was not to be so. It is true that euphoria took over crypto companies and investors in the country during the Finance Minister's budget speech as crypto exchanges witnessed a leap-frog jump in signups on that day. According to data from crypto exchanges WazirX, CoinSwitch Kuber and Unocoin, the number of users who signed up on the Budget day was 30-50 per cent higher than on the previous day.

Then came the fine print and clarifications, and ultimately reality set in. The dust and heat raised by the announcement refuses to settle down as there are more questions than answers in the minds of the investors and traders. The spike in signup on the Budget day was a result of pent-up interest among risk-averse investors as well as corporates who had feared that the digital assets would be banned in India.

In fact, the taxation announcement has created a host of problems for investors and tax experts on how to calculate their gains and taxes. One of the questions in everybody's mind is on what happens to gains made by investors in previous years – that is, will the tax be retrospective? The government has also said that losses from crypto cannot be set off against any other income. But what about losses made by investors in previous years? According to tax experts, if the tax law is not retrospective, losses from the past could technically be carried forward. Will that be allowed by the government, investors ask.

There could also be an issue with how exactly the tax is computed from April to April. Will Indians who saw their crypto assets appreciate during the year and didn't convert them back into Indian rupees face a 30 per cent tax bill as well? Crypto investors in India are also trying to understand how tax will be applied in various real-world situations. Some financial experts still are of the view that crypto losses can be set off against crypto gains in the same year. But still, there is no clarity on the issue as another section of expert begs to differ. Yet another question that is yet to be answered is, if an investor has mined his crypto, then could the cost of his mining setup be set off against the sale of crypto?

The list of questions does not end here. It is still unclear whether gains from one crypto can be offset against losses from another. There needs to have further clarity on the rules around transferring crypto to exchanges or private wallets registered in another country. The crypto community in the country still does not know whether traders can hold crypto as stock in trade and how crypto-to-crypto trade will be treated.

And there is mother of all questions, have virtual digital assets like cryptocurrencies become legal in India with the introduction of taxation on virtual digital assets. As the debate is still going on, experts opine that the industry remains in a legal grey area.

For the crypto community, there is no other option but to wait and watch till the government comes out with the much-anticipated Cryptocurrency Bill.

(The author is freelance journalist with varied experience in different fields)