Rationalise, regulate, revitalise – In search for crypto's 'RRR' moment with Budget 2023

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At one point, not so long ago, the investing world was abuzz with the word crypto. Bitcoin and Ethereum were the talks of the town. The arts and entertainment world went gaga about non-fungible tokens. But true to the laws of gravity (and the markets) – “what goes up must come down”, so did the crypto market in 2022, resulting in write-downs by venture capitalists, defaults by crypto hedge funds, bankruptcies, and a spate of lay-offs. Popularly termed the crypto winter, if anyone was looking for signs to regulate this sector, the writing was on the wall.

Regulating crypto in India – more than what meets the eye

The Indian government’s policy towards crypto has been cautious since the beginning, and understandably so, given its decentralised model. Transactions are undertaken in a peer-to-peer format, all stored in digital ledgers as a chain of blocks. This not only fosters the security and confidentiality of the transacting parties but makes them prone to misuse in illicit activities and financial crimes. Add to that, the volatility of cryptocurrencies makes them a risky asset class for investors. These concerns are well-known and have been debated at length ever since the Supreme Court of India overturned the Reserve Bank of India’s ban on cryptocurrency transactions in March 2020.

Crypto-taxation – first regulatory steps

Multiple attempts were made in the past to create a regulatory framework for private cryptocurrencies. All of that only resulted in the deferral of the Cryptocurrency and Regulation of Official Digital Currency Bill 2021. The first regulatory step concerning cryptocurrencies came in the form of taxation in Budget 2022. While it was not clear if these provisions signalled a softening of the government’s stand on cryptos, the timing of the announcement and the manner of taxation proved to be a dampener. At a time when portfolios of most Indian crypto-holders or ‘holders’ had slid into the red, imposing a flat 30 percent income tax on all crypto-profits and altogether ignoring losses and business expenses, bore down heavily on investors. The result, as expected was a sharp decline in trading volumes. Add to that, the introduction of 1 percent TDS on crypto transactions ate into the working capital of day traders and added to the compliance burden of crypto exchanges on account of the low threshold trigger.

Also Read- Cryptocurrency: What to expect for the digital currency from Budget 2023

Experience of crypto-taxation in India – the aftermath

Declining trading volumes indicated that the incidence of 1 percent TDS on every trade may have discouraged users from trading on KYC-compliant exchanges in India. Instead, this may have incentivised shifting crypto trades to overseas platforms on whom enforceability of such TDS by Indian tax authorities remains ambiguous. The last year also saw searches and raids on crypto exchanges by the Directorate of Goods and Services Tax Intelligence alleging demands for GST on transaction fees and margins only added to the industry’s woes.

Looking ahead – with a ray of hope and expectation

No surprise, the industry is urging the government to provide a rationalised tax and regulatory framework. They would welcome a fair treatment of offsetting trading losses and expenses against trading income and tempering the high TDS rate, considering its objective of creating a transaction reporting trail. With the government’s clear intent to take a consensus-based approach with G-20 member nations towards crypto-regulations, it’s a wait-and-watch for the industry in the hope of a cohesive regulatory policy. Although the crypto winter, marked by the chills of illiquidity and low investor sentiment, continues, all eyes are on Budget 2023 to help bring the much-needed winds of change.

The author is Partner, Tax, at KPMG in India.

The thoughts and opinions shared here are of the author.