India could have treated Bitcoin earnings as capital gains. Instead, it’s taxing crypto like horse racing

February 8, 2022, 3:40 AM UTC

India’s crypto community is split over government plans, announced last week, to tax the volatile virtual asset the same way it taxes winnings from another speculative jaunt—horse racing.

“We have now put in a taxation framework that treats crypto assets the same way we treat winnings from horse races, or from bets and other speculative transactions,” India Finance Secretary T.V. Somanathan told Bloomberg last week after the finance ministry proposed a 30% capital gains tax on cryptocurrency earnings. The tax will take effect in the next financial year, starting April 1.

Fans of cryptocurrency say the new tax plan has one upside: taxing crypto suggests the government might regulate cryptocurrencies, rather than ban them outright, as ministers had previously indicated. But there’s a downside too: the government’s plan treats cryptocurrencies like Bitcoin as a wild gamble, a characterization crypto enthusiasts reject.

“There’s significant myths surrounding cryptocurrencies, and equating them to gambling shows, I think, a general lack of understanding of the potential of blockchain technology,” says Kristin Boggiano, co-founder and president of CrossTower, a crypto exchange.

Under the new tax proposal, cryptocurrencies will be levied more harshly than regular asset classes, like stocks, which are taxed at varying rates starting from 10%. The finance ministry will provide fewer options for claiming tax deductions on crypto investments, too. With traditional asset classes, investors can claim a tax deduction on brokerage fees as well as on the investment itself, but with crypto, there’s no tax deduction for exchange fees.

Besides slapping a 30% tax on earnings made from selling cryptocurrency, the finance ministry will also levy a 1% Tax Deducted at Source (TDS) on each and every crypto transaction, piling on costs for speculative day traders.

“If you are a long-term investor, then paying the TDS should not be a problem. But if you are a day trader dealing with multiple transactions daily then you are finished,” says Raj Kapoor, founder of India Blockchain Alliance. “It discourages speculation.”

According to India’s largest cryptocurrency exchange, WazirX, India has the second-largest number of crypto traders in the world, with an estimated 15 million investors actively swapping digital tokens. Data from the exchange shows that Indian investors hold a total $6.6 billion worth of investment in cryptocurrency, but most of the country’s investors are short term holders, looking to turn a quick profit.  

Late last year, the governor of the Reserve Bank of India, Shaktikanta Das, said he had “serious concerns” about the potential disruption cryptocurrencies could cause to the country’s financial stability, as hordes of small investors chasing windfalls risk losing their savings and being left destitute.

Previously, the Indian government considering banning cryptocurrencies. In November, the lower house of India’s parliament proposed prohibiting all “private cryptocurrencies” in India, with exceptions to “promote the underlying technology and its uses.” But the government has yet to clarify its definition of “private cryptocurrencies” or detail what exceptions it will make to the rule.

Parliament is due to introduce a bill called the Cryptocurrency and Regulation of Official Digital Currency Bill, which will define what kind of digital assets will be cleared for trade, in the first half of this year. The Ministry of Finance will draft the bill after consulting with industry experts and the government cabinet. The bill will then go to a vote in parliament.

“Taxation of cryptos signals that the government is not averse to regulating it. However, taxing something does not mean it is illegal or legal,” says Siddharth Mahajan, partner at law firm Athena Legal. Mahajan notes that gambling is prohibited in several states of India, but the government still taxes income from gaming at 30%—like crypto will be.

Mahajan says that only the fine print of the new legislation will clarify how the sector will be regulated. He argues that the government is eager to rein in crypto because officials are concerned that trade in the assets may transfer money overseas, creating financial instability at home.

But Kapoor warns that increasing regulation on cryptocurrencies could deter innovation in the underlying blockchain technology.

“Young entrepreneurs and startups are opting for more crypto-friendly climes, despite India’s manpower and technology prowess,” Kapoor says. “This taxation may be another nail in the coffin.”

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