India’s cryptocurrency market is in legal limbo. In 2018, the Reserve Bank of India attempted to ban cryptocurrencies outright; the Supreme Court overruled the move, leaving cryptocurrencies neither illegal nor legal.
Despite the lack of legal clarity, India’s cryptocurrency market continues to gain traction. According to a survey by Statista, crypto ownership in the country is the sixth highest in the world, growing from 8% in 2019 to 27% in 2023.
Its allure as a potential avenue for quick wealth is especially attractive to younger investors. India’s largest crypto app CoinSwitch reports that most of India’s crypto investors are aged from 18-25 (45%), followed by 26-35 (34%); just 8% are aged over 45.
New tax regime
Key factors in the rapid adoption of digital assets in India are increased digital literacy, the proliferation of cryptocurrency exchanges and the prospect of potential profits.
Investors will now need to consider the tax liabilities associated with their gains
While the government decides on a more solid position – rumours of a prospective Cryptocurrency Bill remain unsubstantiated – a new tax regime, effective from 1 July 2022 and passed in just two months, aims to tax gains and income from virtual digital assets (VDAs). Additionally, a 1% tax deduction at source is now imposed on each trade, in order to help track the movement of funds. The accompanying guidance released by the Income Tax Department makes it clear that VDAs include all cryptocurrencies, non-fungible tokens and other digital currencies; the situation will become clearer shortly, with the taxation of gains realised in 2022/23.
While this move addresses concerns surrounding crypto gains, it raises important questions about its impact on individuals and the broader cryptocurrency landscape.
For instance, investors must now consider the tax liabilities associated with their gains, which may indicate a drop in crypto investments. Entrepreneurs running crypto trading businesses must navigate the complexities of tax compliance, potentially altering their strategies and profit margins. However, younger investors, who may have no other source of income, are likely to continue to explore VDAs and the emerging digital space of the Metaverse.
Tax frameworks often evolve to address emerging challenges
Unsurprisingly, the legislation – which has been informed by India’s gambling laws – has been criticised by the cryptocurrency sector. In November 2022, Changpeng Zhao, CEO of global cryptocurrency exchange Binance, told a fintech conference in Singapore that the move could ‘kill the industry’ in India. Indeed, the Wazir X exchange reported an 88% decline in daily transactions between June and September.
Growing concern
The idea of taxing gains at 30% without any deductions (except for the cost of acquisition) and without any offset or carry-forward of the losses is undoubtedly a bold move, considering the potential multifold hike in investments.
Yet, the implementation of cryptocurrency taxation reflects a growing concern regarding the rise of digital currencies, signalling a desire to regulate and monitor this evolving sector more closely.
While some individuals may view this move as a dampener on their crypto pursuits, it is essential to recognise that tax frameworks often evolve to address emerging challenges and ensure the stability and transparency of financial markets.
Governments must strike a delicate balance between regulation and fostering innovation
Looking at the broader South Asian landscape, India’s move towards cryptocurrency taxation may influence neighbouring countries’ perspectives on regulation.
As the cryptocurrency industry evolves, governments must strike a delicate balance between regulation and fostering innovation. The path for VDAs in South Asia and beyond will likely be shaped by how they mature and how governments adapt their policies accordingly.
