Navigating the complexities:
There is a saying that encapsulates the process of taxation, and it goes like this: The only two things that are certain in life are death and taxes. The clever mind who coined it is probably trying to explain how wide the ambit of the tax is. A successful state tries to bring maximum number of goods, services and persons under the tax net to get the best benefits. Governments have always caught hold of new developments and brought them under the tax net. Crypto is no different.
Crypto Taxation Evolving in India
The central government imposed a 30% tax on crypto profits in the 2022 budget. 1% TDS on sales was also introduced. For a sector that was largely unregulated, the tax announcement gave the first sliver of hope that some regulation was in the offing. Furthermore, the situation of a taxable asset was even better in a country like India, where unclear areas in regulation and laws become pain points for exchanges and related platforms.
That said, there was a huge drop (60-80%) in trading volume among compliant Indian exchanges as investors moved to use non-compliant global exchanges for their trades.
On March 7, 2023, the central government brought the crypto sector under the provisions of the Prevention of Money Laundering Act, 2002 (PMLA). As per the Act, crypto entities will be ‘obligated’ to record transaction and customer data, monitor compliance and report suspicious activities. This is a recognition of the growing importance of the sector and the need for accurate activity tracking. This indicates that the government is not planning to ‘ban’ the sector, as some are speculating.
Under PMLA, KYC and enhanced due diligence are mandatory. What was until now best practice among crypto exchanges has become a unified goal. The good news is that crypto exchanges can work with the government on red-flagging problematic transactions. In this way, crypto exchanges will also act as reporting entities.
Overall, the government’s message seems clear: invest safely and declare your taxes.
Navigating Crypto From a Tax Angle
We believe that Indian crypto investors can be tax compliant and plan their investments better by following a few principles.
Building a crypto portfolio: India’s crypto tax regime does not allow investors to offset losses in one crypto asset with gains in another. Hence, it is advised not to spread the investment across multiple properties. Instead, sticking to a select list of assets that the investor can be confident about is a better way to approach a crypto portfolio. Given that cryptos receive a higher tax rate (30%) than capital gains through other assets, investors should allocate a smaller percentage (3-5%) of their overall portfolio to cryptos.
Choosing the Right Exchange: Global exchanges currently do not follow Indian regulations regarding TDS deduction and record keeping. It is prudent on the investor to ensure that he is complying with the Indian laws. Therefore, we recommend investors to trade on Indian exchanges which have adopted requisite measures as required by law. The KYC steps are indeed a pain point for investors as well as the exchanges – but once this hurdle is crossed, the experience can be seamless and at par with global brands.
record keeping: To comply with crypto tax laws in India, investors must maintain proper records of their transactions including date of purchase, cost of acquisition and date of sale or transfer. Investors should also keep records of the amount of crypto assets held and the value of the assets at the time of trading. Top Indian exchanges are equipped to maintain and display records on behalf of investors. It is advised that investors regularly update and preserve a spreadsheet of transactions in their files.
Calculation and payment of taxes: The government can now track all investor trades and can do so retrospectively as well. Investors must comply with the law and declare their gains in crypto and NFTs annually. Several services and platforms can help combine transaction spreadsheets from multiple exchanges into one consolidated tax statement. Once again, the onus is on the investor to ensure the accuracy of his tax filing.
Recovery or adjustment of 1% TDS: Investors selling their crypto assets during the year will have to pass 1% of the sale as Tax Deducted at Source (TDS) to the government against their PAN card. This can be offset against any tax payable on the crypto at the end of the year. If there is no additional tax to be paid, it can be declared and recovered from the government.
Stay updated: Investors should stay up to date on the latest tax rules and regulations as the crypto sector continues to grow in India. Major national publications, including o2help cover the sector in detail with opinions from various industry stakeholders. Some newsletters are even worth subscribing to. Investors should also discuss their approach with their tax agent for better clarity.
Overall, the taxation regime for crypto in India is moving in the right direction. Now the onus is on the investors to follow the governance and make the ecosystem trustworthy and robust.
