Regulation
CoinDCX CEO Clarifies Indian Crypto Tax Regulations and Its Impact
Sumit Gupta, co-founder and CEO of Indian crypto exchange CoinDCX, recently spoke with crypto.news in an exclusive interview, discussing the impact of India’s crypto tax policies on the industry.
The introduction of taxes on cryptocurrencies in the Union Budget 2022 marked a turning point for the crypto economy in India. Under Section 2 (47A) of the Income Tax Act, 1961, digital currencies were termed as Virtual Digital Assets (VDA).
A sector once mired in ambiguity has been injected with a sense of legitimacy and moved toward a clear regulatory path.
However, the clarity of the regulations comes with certain constraints of its own. A tax rate of 30 per cent, coupled with an additional 1 per cent TDS on transactions, has quickly become a deterrent for retail traders. Trading volumes crumbled and led the crypto-economy underground or to more tax-efficient coasts.
Nonetheless, industry experts like Gupta are all for formal recognition and the structured environment of cryptocurrencies that now exist.
Even though it’s been over a year since introduction of this new framework, confusion and the proliferation of misconceptions remain among investors, new and seasoned. The ordinary investor is still grappling with the complexity of reporting and calculating taxes on their transactions, especially when it comes to staking, mining, and using cryptocurrencies in everyday business transactions.
Gupta seeks to clarify some of the more complex aspects of cryptocurrency taxation, addressing common misconceptions and providing a clearer understanding of the regulations.
Can you explain the different tax treatments for profits from trading, mining and staking cryptocurrencies and how these rules impact investors? For example, how does the 30% flat tax on trading and mining compare to the flat rate of income tax on staking rewards?
Profits from crypto trading and mining are subject to a flat tax of 30%, with no deductions or compensation for losses allowed. However, gambling income is taxed according to the individual’s income tax bracket, potentially offering a lower rate. The Web3 industry, including CoinDCX, is urging the government to reduce the 30% tax rate on virtual digital assets (VDA) to bring it in line with other asset classes, including securities. The high tax rate and refusal to compensate losses discourages entrepreneurship, innovation, job creation and foreign investment, which could drive talent and capital abroad. Adjusting these tax policies could promote growth and innovation within the industry.
What are the most common misconceptions you’ve encountered regarding cryptocurrency taxes, and how can investors avoid these pitfalls?
It is crucial to dispel the misconception that all crypto activity is taxed at a flat rate of 30% or that staking rewards are only taxable upon sale. Staking rewards are taxable upon receipt, based on market value. Additionally, trading losses cannot offset other types of income. Investors should keep detailed records and seek professional tax advice for effective navigation and compliance. CoinDCX has partnered with KoinX to help users file their crypto taxes. This platform allows users to track tax calculations, connect multiple exchanges and wallets, and view real-time tax amounts for all crypto transactions, including NFT and DeFi investments.
How do you foresee potential changes in global cryptocurrency regulation, particularly those discussed at the G20 meetings, which will influence India’s position on both general cryptocurrency regulation and taxation?
The G20 discussions, particularly those held in India, provided a strong platform for shaping global crypto regulation. Such broad consultations are essential to developing comprehensive frameworks that can be adapted by each country. For India, these discussions provide a model of regulatory clarity, ensuring a balanced approach that benefits all stakeholders. The inclusion of virtual digital asset (VDA) transactions under the Prevention of Money Laundering Act (PMLA) is an example of such regulatory clarity, enabling policymakers to oversee the crypto space and effectively deter illicit activities.
Based on this, how has the inclusion of cryptocurrency transactions under the Prevention of Money Laundering Act (PMLA) affected the compliance and operational practices of the crypto industry in India ?
The inclusion of VDA transactions has proven to be a win-win situation as it provides policymakers with a platform for monitoring and deters illicit actors. This regulation requires strict compliance with KYC (Know Your Customer) and AML (Anti-Money Laundering) procedures, leading to increased transparency and a reduction in the risk of illicit activities. Bharat Web3 Association has published a case study detailing the implementation of these regulations, highlighting the active support of the industry and the central role played by India’s Financial Intelligence Unit (FIU).
Given these regulatory changes, what are the specific challenges faced by high-frequency traders in India due to the 1% tax deducted at source (TDS) rule, and what strategies can be used to mitigate these issues ?
The 1% TDS rule poses significant challenges for traders in India, primarily by reducing liquidity and pushing users to offshore exchanges that do not deduct TDS. This led to a massive shift of over 95% of trading volumes to exchanges outside India, negatively affecting domestic players. To alleviate these issues, the industry is advocating a reduction in TDS to 0.01%, which would help maintain government oversight while keeping the market attractive to investors. This has also significantly reduced liquidity for high-frequency traders. However, due to CoinDCX’s product and reputation as a compliant company, we have seen positive movement and users coming back to us since FIU-India blocked non-compliant offshore exchanges. But a large portion of migrated users remain with substandard exchanges and are exposed to illicit actors.
Do you think there is a chance that the government will reduce the tax burden on crypto?
The industry is pushing for a reduction in TDS to 0.01%, which would maintain the government’s objective of tracking financial flows while making the market more attractive to investors. We hope that the government will consider this request to reduce the tax burden on crypto transactions, particularly the TDS rate, to foster a more conducive environment for innovation and investment.
Finally, if it were up to you, what approach would you take to balance innovation while ensuring compliance?
Balancing innovation and tax compliance requires a nuanced approach, where regulations are clear and support technological advancements while ensuring rigorous oversight to prevent abuse. Engaging with industry stakeholders and studying global best practices can help create a balanced framework. We also recently published a white paper in which we studied global and Indian economic literature, and it came to the same result.