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High taxes pushing investors out of crypto space? Well that’s just tip of the iceberg

The crypto market in India, which attracted a big chunk of new and amateur investors in 2021, is suffering from a lack of trading volumes in 2022 due to a number of factors.

The government implemented 30 per cent flat taxation in gains from the sale of crypto assets from April 1, 2022, and levied one per cent TDS on all crypto transactions since July 1, 2022.

Market participants believe that despite a panic among the crypto investors, the froth has settled, and high tax rates are now sinking in among the traders. However, the unwillingness may not end anytime soon.

Punit Agarwal, Founder and CEO, KoinX, said that the taxation framework was not something that a crypto investor in India was expecting. For the trader that works on small percentage margins, the TDS has been reducing the volume of the funds.

“This is not the only reason for it,” he said. “There have been a lot of factors that have resulted in the downfall of the crypto industry in India, including geopolitical worries, rate hikes by the US Fed and recessionary fears,” he added.

Pratik Gauri, Co-founder & CEO, 5ire, believes that more than the tax regime, it is the complexities and the calculation of taxes on VDAs, that people are scared of. He also blamed the prohibition of setting off losses in one crypto against gains in another as a concern.

Back home, amid the lack of regulations, traders have been sceptical of the digital asset class following the regulatory actions on exchanges like WazirX. The bankruptcy of the trading platform, Vauld, added to investor woes.

The major concern is the safety of the funds for a regular investor, and if that’s being put into question, it can surely impact the crypto volumes in the country, said Agarwal from KoinX.

Indy Sarker, Co-Founder & Director, TaxCryp, believes that regulatory action and scrutiny of business practices at many exchanges have led to continued weakness in trading volumes.

Taxation uncertainty remains in play, but to a larger extent, the turmoil in the industry has adversely impacted investors, he added.

“Investor confidence has taken a major hit because of instances of regulatory scrutiny,” he said.

Market participants do not see the old days of glory back for the domestic investors until the dark clouds of scrutiny and regulatory framework are cast on the crypto space. They are optimistic about the news flow to drive the sector ahead.

The positive sentiments allow us to envision a future for crypto in the country; thus, obviously leading to an increase in volumes as well. At least right now, it seems that we are not that far from it, said KoinX’s Agarwal.

Fudging various VDAs into a single category for taxation purposes will keep investors from investing in them, said Gauri from 5ire. “The Income Tax Act treats blockchain assets,

NFTs and other VDAs homogeneously, which should be treated differently based on the characteristics,” he said.

An investor should make a prudent decision in the use case of every coin they make and avoid the FOMO trap. Long-term investment can actually benefit the investors but an understanding of the nuances and risks associated with it is needed.

DeFi investing will come up for greater scrutiny in the next few days while the interplay between CeFI and DeFi wallets will drive the quest for greater disclosure of the real identity of DeFi wallet holders, said Sarker from TaxCryp.


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