Budget 2024: Crypto Firms Seek Tax Cuts and Regulatory Clarity

The crypto industry has several key expectations from the upcoming Union budget, including a reduction in transaction tax, the ability to set off losses, treating capital gains from crypto assets the same as other income sources, and the establishment of a conducive regulatory regime.

The Budget 2022-23 introduced regulations stipulating that gains from virtual digital assets (VDAs) or crypto assets be taxed at a flat rate of 30%, regardless of the individual's income tax slab rate. Additionally, a 1% tax deducted at source (TDS) was implemented on every transfer of such assets. 

However, despite the introduction of these laws, the government did not address the legality of such assets, which has been a long-standing demand of the industry.

“The biggest challenges for the digital asset market in India are the absence of long-term and short-term capital gains, an extremely high withholding tax that hampers tradability, and the inability of investors to offset their losses against gains. We feel the potential benefits of rationalising these tax components to reasonable levels are significant,” said Manhar Garegrat, country head, India and global partnerships, Liminal Custody, a wallet infrastructure and custody solutions platform.

Lower Tax Incidence

In contrast to the higher capital gains tax rate imposed on the crypto segment, selling listed securities like shares and units of equity-oriented mutual funds (with equity exposure above 65% of the assets) within a year incurs a short-term capital gains (STCG) tax of 15%. For long-term capital gains (LTCG), if these securities are sold after a year of purchase, a tax rate of 10% is applied to gains exceeding ₹1 lakh in a year. 

Ashish Singhal, the co-founder of the cryptocurrency app CoinSwitch, believes that to fully leverage India's Web3 potential, the government needs to reevaluate the tax regulations on VDAs in the upcoming budget. 

“The flat rate of 30% applicable on income from the transfer of VDAs needs to be re-examined to ensure parity with other tech-enabled sectors. Additionally, the threshold of ₹10,000 or ₹50,000 can also be looked at. Most crypto sellers (mainly individuals) are in the low-income bracket. Increasing the threshold will reduce the administrative burden on the tax department in processing refunds,” said Singhal.

Parity with other assets

One significant advantage of investing in traditional assets like stocks, gold, and bonds is the ability to offset losses in one asset against gains in another within the same year, and to carry forward any unadjusted losses for future adjustments. In contrast, losses from one crypto asset cannot be offset against gains from another, and there is no provision for carrying forward losses.

“We have requested the finance ministry to allow the setting-off of losses on one VDA transaction against profits on other transactions. We advocated for the government to consider income from the transfer of assets on par with other income sources,” said Dilip Chenoy, chairman, Bharat Web3 Association, an industry body representing India's VDA sector.

TDS on Crypto Transfers

The 1% TDS, in addition to the 30% tax on crypto gains introduced in the Budget 2022-23, was implemented to monitor the movement of crypto assets. During recent pre-budget consultations, the Bharat Web3 Association recommended that the government reduce this transaction tax from 1% to 0.01%.

“The Indian VDA market has seen a sharp decline in business over the past two years since the 1% TDS and capital gains tax were implemented. The 1% TDS has significantly impacted our business. We expect the upcoming budget to address our grievances and reduce the TDS and capital gains taxes on VDA transactions to reasonable levels, allowing us a level playing field to function and prosper,” said Shivam Thakral, chief executive officer, BuyUcoin, a cryptocurrency exchange.

Singhal argues that reducing the TDS will include most VDA transactions under the tax oversight system, enhance tax compliance, and prevent capital flight.

Regulatory clarity

Crypto industry experts state that the absence of clear regulations has compelled Web3 startups, including crypto companies and entrepreneurs, to relocate to more VDA-friendly jurisdictions like Dubai. “VDA and Web3 businesses are moving offshore. Global venture funds are shy of entering the Indian market, depriving local businesses of funding opportunities. VDA investors are migrating to unregulated offshore exchanges with no protection of the law,” said Thakral.

Crypto players have urged the government to implement what they call “clearer, industry-friendly regulations, and tax reforms” that they believe would allow the sector to “flourish and create new opportunities and revenue streams”.

“In this term, the government has the opportunity to focus on its core constituency—the middle class. As India is a signatory to the G20 ministerial declaration, we can anticipate crypto regulations only by 2025. We hope that regulations will be in the Goldilocks zone—neither too stringent nor too lenient, thus fostering a conducive environment for the industry,” said Rajagopal Menon, vice-president of cryptocurrency exchange WazirX.

Industry experts think that the introduction of the crypto tax was a positive move, demonstrating India's readiness to embrace a progressive stance. However, they now urge the government to treat the crypto industry on par with other sectors.