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 and discussed how India’s crypto tax policies are affecting the industry.

The introduction of taxes for cryptocurrencies in the Union Budget 2022 was a turning point for the crypto economy in India. Under section 2(47A) of the Income Tax Act 1961, digital currencies are labeled as virtual digital assets (VDA).

An industry once mired in obscurity has been injected with a sense of legitimacy and charted towards a clear regulatory path.

However, the clarity of the regulations brought with it some unique burdens. The tax rate of 30% paired with an additional 1% TDS on transactions soon became a deterrent for retail traders. Trading volumes collapsed, driving the crypto economy underground or to more tax-friendly shores.

However, industry experts like Gupta are in favor of official recognition of cryptocurrencies and the structured environment that currently exists.

More than a year after this new framework was implemented, confusion and misunderstandings continue to proliferate among both new and experienced investors. Ordinary investors still grapple with the complexity of reporting and calculating taxes on their transactions, especially regarding the use of crypto in staking, mining, and day-to-day business transactions.

Gupta aims to clarify some of the more complex aspects of cryptocurrency taxation, address common misconceptions and provide a clearer understanding of the regulations.

Can you explain the different tax implications for profits from trading, mining and staking cryptocurrencies and how these rules affect investors? For example, how does a flat 30% tax on trading and mining compare to the income tax bracket applied to staking rewards?

Crypto trading and mining profits are subject to a flat tax of 30%, with no deductions or offsets of losses allowed. However, staking income is taxed according to the individual’s income tax bracket, potentially offering a lower rate. The Web3 industry, including CoinDCX, is calling on the government to reduce the 30% tax rate on Virtual Digital Assets (VDAs) to align with other asset classes, particularly securities. A high tax rate and failure to allow loss offsets discourage entrepreneurship, innovation, job creation and foreign investment, potentially driving talent and capital abroad. Adjusting these tax policies can encourage growth and innovation in the industry.

What are the most common misconceptions you encounter regarding crypto taxes and how can investors avoid these pitfalls?

It is crucial to dispel the misconception that all crypto activity is taxed at a flat 30% rate or that staking rewards can only be taxed on sale. Staking rewards are taxable upon receipt based on market value. Additionally, trading losses cannot offset other types of income. Investors should keep 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 calculations, connect multiple exchanges and wallets, and view real-time tax amounts for all crypto transactions, including NFTs and DeFi investments.

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

The G20 discussions, particularly those held in India, provided a solid platform for shaping global crypto regulations. Such broad consultations are vital to the development of comprehensive frameworks that can be adapted by individual countries. For India, these discussions provide 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 that allows policymakers to police the crypto space and effectively deter illegal activities.

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

The inclusion of VDA transactions has been a win-win situation as it provides policymakers with a platform for oversight and discourages illegal actors. This regulation requires strict adherence to KYC (Know Your Customer) and AML (Anti-Money Laundering) procedures, leading to increased transparency and reduced risk of illegal activity. The Bharat Web3 Association has published a case study detailing the implementation of these regulations, showing the active support of the industry and the important 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 Deduction at Source (TDS) rule and what strategies can be used to alleviate these issues?

The 1% TDS rule creates significant challenges for traders in India, primarily by reducing liquidity and pushing users towards offshore exchanges that do not deduct TDS. This led to a massive shift of over 95% of trading volumes to exchanges outside India, negatively impacting domestic players. To alleviate these issues, the industry advocates reducing TDS to 0.01%; This will help maintain government oversight while keeping the market attractive to investors. It also greatly reduced the liquidity of high-frequency traders. However, due to CoinDCX’s product and reputation for compliant business, we have seen some positive activity and users coming back to us since the Financial Intelligence Unit-India blocked the non-compliant offshore exchange. However, a large portion of migrated users still remain on non-compliant exchanges and face illicit actors.

Do you think the government has a chance to reduce the tax burden on crypto?

The industry advocates reducing TDS to 0.01%; This will preserve the government’s goal of tracking financial flows and making the market more attractive to investors. We hope that the government will consider this request to reduce the tax burden on crypto transactions, especially the TDS rate, to create a more conducive environment for innovation and investment.

Finally, if it were up to you, how would you approach balancing innovation while ensuring compliance?

Balancing innovation with tax compliance requires a nuanced approach where regulations are clear and support technological advances, while ensuring robust oversight to prevent abuse. Engaging with industry stakeholders and reviewing global best practices can help create a balanced framework. We also recently published a white paper examining global and Indian economic literature, which points to the same conclusion.