CoinDCX CEO clarifies India’s crypto tax regulations and their impact

Sumit Gupta, co-founder and CEO of Indian crypto exchange CoinDCX, recently spoke with crypto.news in an exclusive interview, discussing how India’s crypto tax policies have impacted the industry.

The introduction of taxes for cryptocurrencies in the 2022 Union Budget was a watershed moment for the crypto economy in India. Under section 2(47A) of the Income-tax Act 1961, digital currencies were labeled as virtual digital assets (VDA).

A sector that was once mired in ambiguity was injected with a sense of legitimacy and delineated towards a clear regulatory path. 

However, the regulatory clarity came alongside some burdens of its own. A 30% tax rate, paired with an additional 1% TDS on transactions, soon became a deterrent for retail traders. Trading volumes crumbled and drove the crypto economy underground or to more tax-friendly shores.

Nevertheless, industry experts like Gupta are all for formal recognition and the structured environment of cryptocurrencies that now exist.

While it has been more than a year since the introduction of this new framework, confusion and a proliferation of misconceptions among both new and seasoned investors remain. The everyday investor is still grappling with the complexities of reporting and calculating taxes on their transactions, particularly with respect to staking, mining, and the use of crypto in everyday business transactions. 

Gupta looks to clarify some of the more complex aspects of cryptocurrency taxation, addressing common misconceptions and providing a clearer understanding of the regulations.

Can you explain the different tax treatments for profits from trading, mining, and staking cryptocurrencies and how these rules impact investors? For instance, how does the flat 30% tax on trading and mining compare to the income tax slab rate applied to staking rewards?

Crypto trading and mining profits are subject to a flat 30% tax, with no deductions or loss offsets allowed. However, staking income is taxed based on the individual’s income tax slab, potentially offering a lower rate. The Web3 sector, including CoinDCX, is urging the government to reduce the 30% tax rate on Virtual Digital Assets (VDAs) to align with other asset classes, especially securities. The high tax rate and disallowance of loss offsets discourage entrepreneurship, innovation, job creation, and foreign investment, potentially driving talent and capital abroad. Adjusting these tax policies could foster growth and innovation within the industry.

What are the most common misconceptions about crypto taxes that you have encountered, and how can investors avoid these pitfalls?

It’s crucial to dispel the misconception that all crypto activities are taxed at a flat 30% or that staking rewards are only taxable upon sale. Staking rewards are taxable at receipt, based on market value. Additionally, trading losses cannot offset other income types. Investors should maintain detailed records and seek professional tax advice for effective navigation and compliance. CoinDCX has partnered with KoinX to help users file crypto taxes. This platform allows users to track tax computations, connect multiple exchanges and wallets, and view real-time tax amounts for all crypto transactions, including NFTs and DeFi investments.

How do you foresee the potential changes in global cryptocurrency regulations, particularly those discussed in G20 meetings, influencing India’s stance on both general crypto regulations and taxation?

The G20 discussions, especially those held in India, provided a robust platform for shaping global crypto regulations. Such wide-ranging consultations are crucial for developing comprehensive frameworks that can be adapted by individual countries. For India, these discussions offer a template for regulatory clarity, ensuring a balanced approach that benefits all stakeholders. The inclusion of Virtual Digital Asset (VDA) transactions under the Prevention of Money Laundering Act (PMLA) is an example of such regulatory clarity, allowing policymakers to oversee the crypto space and discourage illicit activities effectively.

Building on that, how has the inclusion of cryptocurrency transactions under the Prevention of Money Laundering Act (PMLA) affected the crypto industry’s compliance and operational practices in India?

The inclusion of VDA transactions has been a win-win situation as it gives policymakers a platform for oversight and discourages illicit actors. This regulation necessitates strict adherence to KYC (Know Your Customer) and AML (Anti-Money Laundering) procedures, leading to enhanced transparency and reduced risk of illicit activities. The Bharat Web3 Association released a case study detailing the implementation of these regulations, showcasing the industry’s active support and the pivotal role played by the Financial Intelligence Unit (FIU) of India.

Given these regulatory changes, what are the specific challenges faced by high-frequency traders in India due to the 1% Tax Deducted at Source (TDS) rule, and what strategies can be employed to mitigate these issues?

The 1% TDS rule poses significant challenges for traders in India, primarily by reducing liquidity and pushing users towards offshore exchanges that do not deduct TDS. This has led to a massive shift of more than 95% of trading volumes to exchanges outside India, adversely affecting domestic players. To mitigate these issues, the industry is advocating for a reduction of TDS to 0.01%, which would help maintain government oversight while keeping the market attractive for investors. It also reduced the liquidity for high-frequency traders by a big margin. However, because of CoinDCX’s product and reputation for compliant business, we have seen some positive movements and users returning to us since the FIU-India blocked non-compliant offshore exchange. But, a large chunk of migrated users still remains with non-compliant exchanges and face exposure to illicit actors.

Do you think there is a chance that the government might reduce the tax burden on crypto?

The industry has been advocating for a reduction of TDS to 0.01%, which would maintain the government’s objective of tracking financial flows while making the market more attractive for investors. We are hopeful that the government will consider this request of reducing the tax burden on crypto transactions, particularly the TDS rate, to foster a more conducive environment for innovation and investment. 

Lastly, if it were up to you, what approach would you take to balance innovation while ensuring compliance?

Balancing innovation with tax compliance requires a nuanced approach, where regulations are clear and supportive of technological advancements while ensuring robust oversight to prevent misuse. Engaging with industry stakeholders and studying global best practices can help create a balanced framework. We have also released a whitepaper recently, where we have studied the global & Indian economic literature, and it points to the same outcome.