For a newborn sector, finding a stable turf on which to grow can be a complicated affair when the world itself is in motion. Cryptocurrencies and the traditional economic system present exactly such a duality—paired in a difficult tango. Finance minister Nirmala Sitharaman’s budget speech threw some mottled light on an area of darkness. Both the nascent industry and the enthusiastic flock of investors it has attracted were only partly dismayed by the news that crypto trading would be taxed at 30 per cent. Yes, such a high rate was a dampener. But it also meant that, for the first time, the government seemed to recognise cryptocurrency as an asset class. A legitimisation of sorts, which went contrary to expectations that the Centre was planning to ban all cryptocurrencies, with the RBI raising serious concerns on how their unregulated nature and extreme volatility was adversely impacting the financial system.
However, as part of the 39 amendments to the Finance Bill that got passed in the Lok Sabha on March 25, the Centre has made an explicit clarification that has once again poured cold water on all the excitement. Losses incurred on the sale of one virtual digital asset—in this case, trade in cryptos—won’t be allowed to be set off against gains made on another. This means crypto investors will have to pay a 30 per cent tax for every gain they make, irrespective of whether they also make losses, and their overall portfolio for the year is marked in red. If you lose money on, say, Bitcoin, that cannot be set off against income from other assets—for example, on Ethereum. Experts feel this amendment is a reversion to a conservative stance, and will only disincentivise investors in what was otherwise a ‘happening’ sector.
“I see it as a very negative thing,” says Saksham Jain, 25, a crypto investor in Aligarh. People like him were ready to accept the high taxes announced in the budget, but the ‘no offset’ clause as defined in the amendment has left them foxed. “It makes no sense to me,” he adds. According to him, what investors are keen on is the total portfolio value of the investments they make in a year, not the profits or losses on individual cryptocurrency deals. The general concern is that these measures will weigh down on investment sentiments and lead to a bear market in the short term.
Despite its infancy, this is not a small sector either. As of November 2021, some 15-20 million Indians had invested around $6 billion (Rs 45,600 crore) in cryptos on digital platforms. There are nearly 40 such crypto exchanges, big and small, who vie with each other to lure potential investors, especially the youth. “This (the amended law) is detrimental for India’s crypto industry and the millions who have invested in this emerging asset class,” says Ashish Singhal, co-founder and CEO of CoinSwitch, a trading platform. “We fear the lack of provision to offset losses will drive users away from KYC-compliant exchanges and platforms to the underground peer-to-peer grey market, which will defeat the purpose of the tax.”
Since the budget did recognise virtual digital assets as a legitimate asset class, a natural course of action would have been to progressively bring regulations around them on par with other asset classes, he says. Instead, India has taken a step backwards, he feels. “If a regressive provision such as this was applied in equities, it would discourage retail investors from participating,” he says. What people like Jain are hoping for is that the Centre finally reviews the policy under pressure from investors.