The Indian Union Budget for FY 2022-23 introduced the classification of digital currencies as Virtual Digital Assets (VDAs) for tax purposes. However, experts pointed out that their processing is quite different from other actives.
According to Archit Gupta, Founder and CEO of Clear (formerly Cleartax), India’s tax regime for digital assets has some intricacies that need to be handled with caution. He explains them to Financial Express, an Indian financial news provider.
Gupta explains that the law must be applied to every digital asset held by an investor. This means that every provision of the law, including the payment of a 30% flat rate income tax on profits, must be applied to each VDA.
He also explains that there is no loss compensation applied to individual digital assets. For this, losses from trading one digital asset cannot be offset by profits from another. He cites an example saying that the losses from a Bitcoin transaction cannot be offset by the profits from an NFT transaction.
“If you have a loss from transferring crypto in one fiscal year, it cannot be carried over to the next year to offset future gains,” he added.
He also warned that digital currencies earned through airdrops and gambling could fall under the gift law provision and could be taxed as such in the hands of the recipient.
While noting that the law is still not entirely clear, particularly regarding the definition of a “transfer”, he recommends that all Indian digital asset investors be prepared to file their taxes at advance.
The impact of India’s tax regime on digital assets
Since the tax laws came into force on April 1, they have had a marked impact on the digital asset market and industry in India. Observers have noted an 80-90% drop in trading volumes among India’s top digital currency exchanges.
The downturn also hit the value of digital assets in the country, as they saw a 60% drop following the implementation of the law. Some say the exorbitant tax rate will eventually lead to a brain drain for startups and an exodus of investors.
This was demonstrated by the rapid exit of Coinbase (NASDAQ:COIN) from the Indian market within days of commencing operations. Meanwhile, the government does not seem to reconsider its position and is even considering introducing a 28% Goods and Services Tax (GST) on digital currency transactions.
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