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Indian retail crypto investors confused by government’s plans

By Munikoti Rochan

04:30, 11 February 2022

A concept of red, amber and green traffic lights glowing in unison.
There is still some confusion surrounding India’s diktat to tax cryptos – Photo: Shutterstock

Rachay shut his successful restaurant business in the Caribbean during the coronavirus pandemic as travel bans ravaged his business. While he has returned home to India, he still keeps Western hemisphere hours.

Instead of feeding hungry tourists, he now earns a living from trading stocks and crypto during European and American market hours, when volatility is at its highest.

The Indian government’s 1 February announcement that it would tax cryptocurrency profits at 30% is said to have effectively legalised a market that previously operated in a grey area. But it still leaves many unanswered questions for the country’s numerous digital asset users. 

For instance, Rachay is unsure how much short-term and long-term traders would pay in taxes under the Indian government’s proposals. “Do we have to pay on our losses too? If yes, how are we supposed to calculate losses? Thirdly, the tax rate is too steep.”

He expects authorities to publish a white paper – an informational document – on cryptocurrencies before 1 April, which marks the beginning of the Indian financial year.

Nagaraj, an India-based software engineer in his mid-30s, is another who shares the same concerns. He told Capital.com that he has been investing in both bitcoin and ethereum since 2016 – but in the US. 

“Back then, there was no buzz in India over crypto. My approach of getting a friend to place bets for me in the US worked. I think crypto could replace gold as a store of value in the future.”

“For now, I’m a holder. But if I decide to start trading, must I pay the government for every transaction, in addition to the 30% levy on gains?”

15 million crypto party animals

Indian Finance Minister Nirmala SitharamanIndian Finance Minister Nirmala Sitharaman – Photo: Shutterstock

India Finance Minister Nirmala Sitharaman’s resolve to collect taxes indicates that crypto legality has been established, according to YouTuber Akash Banerjee. His channel ‘The Deshbhakt’ (or ‘The patriot’ in Hindi) boasts over 2.3 million followers.

At first, the government wanted market participants to cancel “their pool party”. But now, it wants to “jump into the swimming pool” to unravel why “party-goers” are having such a good time, said Banerjee, a former TV journalist, in a recent video post.

The plunge comes in the wake of 15 million Indians reportedly pouring INR450bn ($5.97bn) into crypto assets, he said. And trade has helped spawn two unicorns, CoinSwitch Kuber and CoinDCX, both cryptocurrency exchanges.

“Why should all the boys and girls have fun? [The administration] should also have fun. Therefore [the government] will impose a 30% tax on your party.” Banerjee said. His video was sponsored by CoinSwitch Kuber.

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Taxing cryptocurrency

Sitharaman’s proposal to tax digital assets at 30% could be “fun” for the government, but the move also places cryptos and non-fungible tokens (NFTs) in the highest tax bracket in the South Asian nation. 

The proposed tax rate is also much higher than the ones set up by US authorities, points out Abhishek Bhonsle, a 36-year-old creative director at an advertising agency, who holds cardano. 

“Bitcoin was out of reach,” he told Capital.com. “In terms of sustainability, scalability and interoperability, cardano seemed like it had room to grow. And it was founded by ethereum co-founder Charles Hoskinson.”

Bhonsle is not happy about the application of a blanket tax on crypto. The government should put down tax slabs ranging from 10% to 30% for small to large gains, “like in the United States”, he said.

In the US, the Internal Revenue Service collects a 10%-37% tax on profits made from crypto assets held for less than a year, which is a short-term gain. However, the levy on profits from assets held for more than a year hovers between 0% and 20%.

Huge opportunity to create wealth?

Physical cryptocurrencies of Monero, Ripple, Litecoin, Bitcoin, Dash, Ethereum with the India flagA blanket tax on crypto by the Indian government has made many traders unhappy though its legality has been established through its taxation – Photo: Shutterstock

A Bengaluru-based businessman, who requested anonymity because his start-up is in talks with a few celebrities for NFT projects, said the sheer popularity of crypto in India meant it would have been difficult for the Indian government to ban private-sector digital currencies.

“Too many people in India have crypto already. I don’t think the regime wants to deprive Indians of a chance to create wealth.”

“My only concern is that in their attempts to regulate it, they might label some investments as illegal. The prices of whatever is deemed illegal will crash, suggesting that many investors could end up cashing out at a lower rate,” he added.

For Bhonsle, the level of uncertainty around crypto taxation and regulation in India means that while he would stay active in the crypto market he might move his assets abroad. 

“India could ban altcoins (like cardano) in the future. I hold some doge too...my coins aren’t doing great now. My plan is to shift my wallet to my brother who lives abroad. He can hold on to it for five, six years and sell,” Bhonsle added. 

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The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
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