A down-on-its-luck Indian government seeking its pound of flesh on the exponential gains made in digital assets is putting off investors in the asset class.
India will seek a 30% tax on all profits made off on the sale of virtual digital assets and crypto assets starting April 1. It will deduct a 1% tax at source on every crypto transaction starting July 1. The government also won’t allow investors to offset losses with gains made elsewhere.
If that wasn’t enough, the legal status of the asset class also hangs in limbo with the Reserve Bank of India repeatedly cautioning against crypto transactions, and its deputy governor even suggesting an outright ban.
“The taxation laws on crypto trading are scaring me now,” said Sagar Chatterjee. The 35-year-old entrepreneur was looking to invest in cryptocurrencies and diversify his investment portfolio.
“I will hardly be able to make any profits if I invest in crypto and my entire income will go into paying all kinds of taxes imposed on this asset class,” Chatterjee told Forkast. “I much rather stick to mutual funds for now where I have consistently booked profits without any worries and therefore have more confidence in the asset.”
See related article: Indians see future in crypto, government sees revenue, FM says
Chatterjee is not alone. The digital assets space has attracted mostly young and first-time investors in a country that will continue to have one of the youngest populations in the world till 2030.
Indian crypto exchanges say that about half of their users are below 35 and have relatively better risk-taking abilities with an inclination towards technology and innovation. However, many of them are either in the lowest income tax bracket or do not generate sufficient income to pay taxes at all.
India taxes on a progressive and proportional basis with direct tax on income ranging between 5% to 30%. An additional tax of between 15% to 37% applies on the rich. All of this doesn’t include additional levies uniformly applied on all income brackets.
This particularly hurts people at the lower end of the income distribution and younger investors with only salaried income.
The additional tax along with the volatility in the asset class impacts returns when adjusted for risk. This is especially true in a rising rates environment as investors find they aren’t compensated enough for the risk in investing outside of a safe haven.
“You never know what new things the government will come up with,” 33-year-old Naimish Sanghvi told Forkast. The founder of cryptocurrency news platform Coin Crunch India is considering limiting crypto investments to 5% of his portfolio if not completely shunning the asset class in the next financial year beginning April 1. About 20% of his portfolio was invested in cryptocurrencies in the current financial year ending March 31. “It makes no sense to park my money there if I can’t take it out without paying hefty taxes.”
Come April, Sanghvi plans to rejig his portfolio with stocks and mutual funds making up for one-fourth of investments from 10% now. Reducing his crypto exposure makes sense “mainly because of the uncertainty, excessive taxation and scrutiny, and the surprise nature of these things,” Sanghvi told Forkast.
Some are even offloading their crypto investments for the first time in order to have a fresh start from April 1.
Take for example 24-year-old Neel Kukreti, a YouTuber who posts crypto educational videos on his channel. An investor in cryptocurrencies since 2018, he told Forkast he sold off all his crypto investments this month. That enabled Kukreti to book profits by paying about 20% capital gains tax for the current financial year instead of more than 30% next year.
This was the first time he sold off his crypto assets, Kukreti said.
“I saw the rise in cryptocurrencies and the interest around it,” Kukreti told Forkast. “Crypto seemed the most promising, that’s why I thought of taking a leap of faith and getting into it.”
“Next financial year, I am going to drastically reduce my crypto trading frequency so I don’t lose capital by paying TDS on every transaction,” Kukreti said, referring to the Indian acronym for tax-deducted-at-source. “I will also reduce my crypto exposure and shift my trading to stocks mostly.”
Kukreti still aims to invest about 25% of his portfolio in crypto from 60% before the sell off, he told Forkast.
Experts say India would have been better off starting with a lower rate of taxation for a still nascent investment class. This would have helped address the rising fiscal deficit despite the country’s economy moving towards normalization post COVID-related lockdowns.
India’s fiscal deficit — the difference between total revenue and total expenditure of the government — is projected at 6.9% for the fiscal year that ends in March 2022, higher than previously estimated.
The government has been cracking the whip by sending out tax demands to investors who made profits from crypto trading as far back as 2017. According to the demands seen by Forkast, investors have been asked to explain the difference between income declared to local tax authorities and the investments made in cryptocurrencies.
Even the big fish haven’t been spared.
Bollywood superstar and Indian icon Amitabh Bachchan reportedly paid about US$130,000 (about 10 million Indian rupees) in goods and services tax (GST) towards the sale of non-fungible-tokens (NFT) in November of last year. Exchanges are also in the tax department’s crosshairs. The Central Goods and Services Tax authority said on Monday that it collected over US$10 million from 11 crypto exchanges accused of evading GST.
See related article: Bollywood megastar Amitabh Bachchan ponies up tax on NFT sale
No surprise then that India’s young and not so relatively well-heeled crop aren’t too enthusiastic anymore about investing in digital assets.
“I think brave young people looking to explore this world would rather invest in other assets like commodities or stocks, where the tax treatment is less draconian,” said financial markets expert Pradeep Gooptu. “Cryptocurrency in India has suddenly become like an uninsured home or car — if you suffer a loss, it’s gone for good.”
