1% TDS on cryptos is a blessing in disguise for Indian investors

Mumbai: The imposition of one per cent TDS on every crypto currency related transaction since July 1, by CBDT, as per Budget announcement, is a blessing in disguise for Indian investors in the virtual currency. Frankly speaking, this means that when you are selling any cryptocurrency, you will pay a one per cent TDS on the total order value plus a 30 per cent tax on your profits if any.

Talking to Bizz Buzz, Gaurav Mehta, founder, Catax - online crypto accounting and taxes solution, says: "The reason was that it pushes people to HODL (Hold Cryptocurrency for a Long Time) and makes crypto speculation, manipulation, and pump-and-dump schemes harder owing to capital being locked with each trade. As malicious individuals in the crypto ecosystem are prevented from manipulating and scalping the market with false price moments and by moulding pseudo-sentiment, India will see fair price discovery."

According to Catax analysis, around Rs60,000-70,000 crore have been invested in various cryptocurrencies over the past five years in the country. It is believed that revenue collection in form of taxes from 30 per cent tax clause should be in few thousand crores as many people have incurred losses and hold on to crypto assets for long period.

No official data has been given by exchanges about the number of active users, however approximately 20 million people have completed KYC on exchanges in order to open a crypto wallet.

"I believe, active crypto investors are in range of half a million or more, others have just crypto FOMO (Fear Of Mission Out) to create accounts," Mehta added.

Market meltdown shouldn't have come as a surprise to players in ecosystem as expansion must to backed by adaption and utility. Although, interest in cryptocurrency has risen tremendously across the world but investment from masses was limited owing to intricacy of subject and status of legislation while price of crypto has continued to surge. Activities are centred around few exchanges and institutional participants who have actively dictated towards crypto sentiments and price discovery.

I personally feel, Mehta said, bulls and bears are determined by the internal consensus of crypto participants. On other hand, surreal and unregulated financial infrastructure created of blockchain via DeFi and stable currencies was ticking bomb as returns were absurd, unsustainable and risky. It is reported that crypto market is of trillions of dollars but in reality, is few hundred billion dollars and easy target for market veterans.

He added, "we have observed demise of LUNA and other experimental stable coins from such extreme manipulation and impacts are obvious in whole market - lost faith in crypto consequently market crash and low prices. Only regulation would bring back confidence of people."

Crypto exchanges have already started deducting the TDS from its crypto investors.

"ZebPay will deduct TDS applicable on all trades on behalf of our users. The deducted amount can be claimed by users during annual tax filing. We have set up systems to effectively deduct TDS before settlements with transacting parties are made. This is in line with legal requirements and will ensure a high degree of compliance is achieved for all trades on our platform," says Tarun Jain, CFO, ZebPay.

However, Indian investors can gain exposure to Bitcoin, Ethereum, and other crypto assets indirectly without having to buy any cryptocurrency directly. This has been made possible by Vested Finance. For example, you can invest in the ProShares Bitcoin Strategy ETF which offers investors an opportunity to gain exposure to Bitcoin without buying any Bitcoin. Alternatively, you can invest in Bitcoin Vest, a model portfolio that tracks the price of Bitcoin.

The company has also added cryptocurrency-backed securities offered by Grayscale Investments to their premium offerings on the platform. Through Grayscale, the largest digital asset manager in the world, getting exposure to cryptocurrency is just like buying a US stock. Not only will you not have to pay a flat 30 per cent tax on crypto profits, you will also not be subject to TDS when you sell your holdings.

One common thread - makes will not be enthused with the development. The sentiment is gloomy to say the least today now the one per cent TDS will vilify an already bad situation. Exchanges already have liquidity issues and layoffs seem to be trending daily in the crypto space.

The one per cent TDS is going to choke the market further because liquidity providers will back out. Not to mention, compliance is going to extremely difficult for exchanges and users to adhere to. The market seems broken for now. Speculation will surely take a back seat as speculators, day traders, and pump-and-dump players now look for alternative options.

Raj Kapoor, chief advisor, aCryptoverse, says: "But all is not lost really as the average investor will now calibrate his strategy for a long haul and continue holding it for the long term. In the bigger scheme of things, the one per cent TDS will be a minor impact which holds significant potential for volatility and return."

The recent provision of one per cent TDS on crypto transactions is a modern instance of a tax provision that would be highly detrimental to the crypto industry.

Amajot Malhotra, country head, Bitay, says that the tax provision will not only discourage the innovators who have been doing a great job in promoting India as an Innovative hub for the industry, but the government too will be at a loss as they will lose out on the possibility to earn massive tax revenue due to overall decreased transaction volumes on crypto platforms.

As an advance tax, TDS withholds capital at every sell transaction. This is expected to impact the liquidity in the market. But a precise assessment of the impact on trading can only be made after July 1 as the market is currently weighed down by several macroeconomic factors. An informed observation can be made only once the TDS comes into effect and we can isolate its impact from the other market factors.

CoinSwitch will be enabling its users with the implementation of the TDS. We will deduct the advance tax as per the rules and provide users with a transparent invoice breaking up the deductions and fees. Further, every quarter, we will provide users with a TDS report detailing all the deductions for the three months. These documents will simplify the process for users at the end of the financial year as the income tax rules allow individuals to adjust the TDS deductions against the overall tax liability, said a company spokesperson.

Rajagopal Menon, Vice President at WazirX, says: "Set processes are in place to collect TDS for relevant transactions. First, the TDS collected needs to be paid to the Income Tax Department in Indian currency. For this, any TDS collected in the form of crypto has to be converted to rupees. For ease of conversion and to reduce price slippage, in crypto to crypto transactions, the TDS for both sides would be deducted in the quote (or primary) crypto asset. WazirX markets have 4 quote assets-Rupees, USDT, BTC, and WRX. For example, in the following markets: MATIC-BTC, ETH-BTC, and ADA-BTC, BTC is the quote crypto asset, and hence the TDS of both the buyer and seller trading in these markets would be deducted in BTC."

At present, it is still premature to predict the ramifications of TDS. We will be in a better position to understand this by the second week of July.

Talking from NFT point of view, Kameshwaran Elangovan, co-founder & chief operating officer at GuardianLink, said: "Our focus is more on adhering to the new taxes rules and meeting the required standards that are being set. There has been a fall in trading across the industry as investors shift to hold and there may be another dip as traders see their capital getting locked, while trading on KYC-compliant Indian exchanges."