With new rules coming into force in April, several investors are booking profits, rejigging portfolios or moving their virtual assets outside of India.
Rajesh Bhayani reports.
With days to go before the new tax regime around crypto assets kicks in, several investors are reportedly either booking profits, rejigging their portfolios or moving their crypto assets to their private wallets outside of India.
Starting April, gains from trading in crypto and other virtual assets like non-fungible tokens (NFTs) will be taxed at a flat 30 per cent, as announced in the Union Budget. And, 1 per cent of tax will be deducted at source (TDS) on every transaction involving crypto and other virtual assets.
The new tax regime also bars investors from offsetting losses from one crypto asset (such as Bitcoin) against gains from another (say, Ethereum).
Dinesh Kanabar, founder and CEO of Mumbai-headquartered tax and regulatory firm Dhruva Advisors, says that investors have been squaring off transactions/booking profits ahead of the new tax rules.
“While the government attempt to tax the crypto income is understandable, there are many practical challenges,” he says.
“The rate of tax combined with the restrictions on offsetting losses against profit make the tax regime regressive.
"The ability of revenue to track the transactions is limited and the withholding burden on the exchanges will prove to be a challenge.”
He adds that already those engaged in crypto trade are looking for newer pastures and relocating.
“People will certainly square off trades before March 31 to accrue the losses, which can currently be offset, or recognise profits, which are currently not taxable at 30 per cent.”
Crypto exchanges, too, hint at increased activity on this account, though many of them do not say it in as many words.
Ashish Singhal, co-founder and CEO, CoinSwitch, a crypto unicorn, says that it is difficult to gauge an exchange-wide trend but adds that investors may be booking profits according to their individual strategies.
Tax harvesting is a commonly used tax planning strategy to adjust the tax liability on capital gains,” he says.
“Across asset classes, investors often find it wiser to book losses or profits on certain assets than carry them forward to a new financial year.
"Similarly, crypto investors, too, may find it wise to sell some of the assets accruing profits or losses now, before the new financial year.”
Singhal says this is an individual tax planning strategy and may vary from person to person.
“Therefore, it is difficult to assess a platform-wide trend and pinpoint selling or buying strategy to tax planning,” he adds.
After the Union Budget was presented on February 1, Bitcoin prices were up nearly 20 per cent from their January low. Bitcoin is now up over 50 per cent.
Those who track the crypto industry say a number of entrepreneurs are also exiting it.
The government’s stand has so far been unconducive for the industry and its ecosystem, they add.
There is yet no clarity about the legal status of crypto assets and the government has in the past said that a crypto tax doesn’t guarantee it a legal status.
However, the Union finance minister has since stated that the government is in talks with the industry and experts on possible regulations.
Sidharth Sogani, CEO, CREBACO Global, a research and rating firm focused on the blockchain and crypto industry, says, “We have seen approximately 100 entrepreneurs who have moved out of India or are in the process of moving out as the business climate in the country is not conducive for growth.”
The crypto industry ecosystem includes exchange platforms, wallet service providers, blockchains, NFT developers, consultants and so on.
Several software developers, say industry insiders, are getting more opportunities outside India and are moving out, and this is also a loss to India in terms of earning forex.
An industry expert, who does not wish to be named, says that many investors have started withdrawing their crypto holdings from wallets maintained by crypto exchanges and transferring them to their private wallets that may be outside India.
The source estimates around 10 per cent of crypto wealth held by Indians in India may not remain in the country or may not remain on books.
And the authorities, he adds, will find it difficult to trace it.
The value of holdings by Indian investors is estimated around $80 billion, and this industry expert claims that some 10 per cent of that might have already been moved out of India.
Had there been a reasonable and just tax regime, he says, all of this would have remained in the country, and the industry would have grown and contributed to the GDP.