Crypto volumes take a hit after new tax rules; what’s the road ahead?

Before FY 2022-23, cryptos were not specifically taxed under the Income Tax Act, and most people profitably cashed out their crypto holdings by showing them as capital gains or business income and paying the appropriate tax. Hence, with the introduction of new income tax rules on cryptocurrency, it was apparent that there would be some discomfort in the crypto industry.

The new tax rules require crypto investors to pay tax at 30% (the highest tax bracket) on profits from the sale of crypto and NFTs. Unlike in other asset classes, retail investors will not be able to set off losses incurred against crypto coins, claim expenses or deductions, or benefit from a reduced slab for long-term capital gains.

To trace crypto transactions, the government has imposed 1% TDS on every crypto transfer. This has come into effect from 1st July 2022. The new TDS provision would significantly impact intraday trader’s capital. The funds will be locked up to a year until the income tax returns are filed for refunds.

As per industry reports, there was a drop in volumes of crypto transactions in the initial days after the crypto tax law came into effect. And as per experts, the volumes would further drop. However, before the new TDS law was effective, the government issued clarifications for the same. An attempt is made to remove hardships for the crypto traders by shifting the TDS compliance responsibility to crypto trading platforms.

The exchanges are expected to include TDS clause in the existing customer agreements. They may also have to offer investors an understanding of how wallets’ balances will be impacted due to TDS. They will have to keep a trail of all the transactions and do TDS reporting compliances. Apart from this, they would also benefit from offering their customers a full profit and loss view and tax implications on transactions. Investors, too, have to work on the advance tax implications and assess tax dues quarterly.

But in the initial few days, the investors still don’t fully understand how these provisions will work and what will be the impact for them.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

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