From tax reduction to regulatory clarity, here’s what crypto industry expects

The crypto industry has several key expectations for the upcoming Union budget, including a reduction in transaction taxes, the ability to offset losses, the equal treatment of capital gains from crypto assets with other income sources, and the establishment of a supportive regulatory regime.

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

However, despite these new regulations, the government did not clarify the legality of these assets, a long-standing demand from the industry.

“As the government prepares for the upcoming Union Budget 2024-25, we urge them to create a conducive regulatory and tax environment that supports the burgeoning digital economy and fosters innovation. The current taxation framework for Virtual Digital Assets (VDAs), introduced over two years back in the Feb 2022 Budget, has led to unintended consequences even for the Govt and the exchequer, primarily via a massive shift in VDA transactions to offshore platforms, impacting tracking and tracing of such transactions,” said Ashish Singhal, Co-founder, CoinSwitch.

Rajagopal Menon, VP, WazirX, expects reduction is TDS on transfer of VDAs, setoff and carry forward of losses, par treatment of income from VDAs from the upcoming budget 2024-25.

Reduction of TDS on Transfer of VDAs

One of the main requests is to reduce the Tax Deducted at Source (TDS) rate on the transfer of Virtual Digital Assets (VDAs) under Section 194S to 0.01%. Currently, the higher TDS rate of 1% acts as a deterrent for investors, leading to decreased market liquidity and participation. Lowering the TDS rate would encourage more transactions and foster a healthier trading ecosystem. Additionally, it is recommended to revise the threshold limit for tax deduction under Section 194S, increasing it from ₹50,000 to ₹5,00,000.

Setoff and carry forward of losses

The crypto community is advocating for the ability to offset and carry forward losses, similar to other sectors. Currently, losses from trading VDAs cannot be carried forward to offset future gains from VDAs or any other income sources, discouraging long-term investment and strategic trading. Allowing this flexibility would align the crypto market with other financial markets, promoting a more stable and investor-friendly environment.

Par treatment of income from VDAs

Another significant demand is to treat income from the transfer of VDAs on par with existing income sources. This involves recognizing and taxing crypto income similarly to traditional forms of income, such as from stocks or mutual funds. Such a change would simplify tax compliance for crypto investors and help legitimize cryptocurrency as a mainstream asset class. Additionally, amending Section 115BBH to reduce the tax rate from 30 percent to a rate comparable with other industries would be a welcome improvement.

Call for regulatory body

In addition to the financial adjustments mentioned, there is increasing advocacy for establishing a dedicated regulatory body to oversee crypto transactions. Such an institution would ensure transparency, protect investors, and provide clear compliance guidelines, thereby fostering trust and stability in the market.

While the industry welcomed the definition and inclusion of VDAs in the Income Tax Act, certain provisions—such as the high TDS rate and the lack of offset—have led many Indian VDA users to migrate to non-compliant foreign exchanges for trading. This puts them at risk of losing their investments and breaking the law, resulting in reduced tax revenues for the exchequer.

The RBI’s June 2024 Financial Stability Report (FSR) highlighted the implications of Decentralised Finance (DeFi) for financial stability, aligning with global regulatory efforts to create a secure and stable environment for digital assets. As the Union Budget approaches, incorporating these insights by establishing a robust regulatory framework under SEBI or RBI can help mitigate stability risks in the DeFi and digital asset space, ensuring India remains competitive in this evolving global market.

The crypto community remains hopeful that the Ministry of Finance will consider these proposals, leading to positive outcomes in the Union Budget 2024-25. Implementing changes such as reducing TDS and allowing the setoff and carryforward of losses would encourage broader participation in the crypto market. A supportive regulatory environment is crucial for stimulating innovation, as it empowers the industry to transform existing businesses through the integration of blockchain technology.