Crypto Winter, Tax Rules Cast Shadow on India Business; Can They Still be Called Safe?

Indian investors had readily accepted cryptocurrency as a brilliant means to invest especially after the Bitcoin boom that happened a few years back. Through all these years, India became one of the major countries where crypto trading saw the largest volumes, with millions-worth of trade happening in mere hours. However, the government and the Reserve Bank of India have always had their reservations around these digital tokens, with both of them fearing that cryptocurrencies would have a severe impact on India’s economy and also aid to crimes.

With its not-so-accepting approach to cryptocurrencies, the government during Budget 2022 inserted a new Section under the Income Tax Act, whereby income from virtual digital assets would be taxable at the rate of 30 per cent, while also imposing a 1 per cent TDS on these digital tokens. Both the tax provisions were inserted at a time, when co-incidentally, the crypto world in the global scenario was seeing a prolonged onslaught as the markets prepared for a long winter amid the Russia-Ukraine war.

Trading Volume Takes Major Hit in India

This came as a double edged sword for India, where investors were quick to pull out from investing in cryptocurrencies. Trading has taken a hit in India over the pas few months, with investors refusing to put their money in an asset that will attract such high taxes, and is also seeing a crash.

“With the insertion of Section 115BBH in the Income Tax Act, income from transfer of any virtual digital asset (VDA), has become taxable at the rate of 30 percent. This development along with the applicability of 1 per cent TDS, inter alia, apparently, have made current and potential cryptocurrency traders and investors wary in wake of the fact that a substantially high tax liability would be attributable to income that may be generated out of cryptocurrency trading and investment,” Aditya Chopra, managing partner at Victoriam Legalis – Advocates and Solicitors, told News18.com.

The tax rules recently imposed in India would block the liquidity needed to revive the bear markets. “The central theme of crypto is decentralisation. Therefore, these tax rules will increase the regulatory and compliance burden. The tax rules have further increased the challenges as they may lock up the required liquidity to revive crypto markets,” said Archit Gupta, founder and CEO of Clear.

Investing in Cryptocurrencies Still Safe?

With trading volumes inching lower steeply in India ever since the government implemented the 1 per cent TDS provision, crypto investors already reeling under bear market pressure may ask if these can still be considered as a safe asset.

“To answer the question of whether investing in crypto can still be considered safe, we will need to visit the basics of investing and understand tokenomics, token utility, the potential risk-return trade-off and diversification of asset class. This will help investors make calculated investment decisions without throwing all the caution to the winds. One can also choose to invest in them through shares of companies with a stake in blockchain technology or any crypto,” Gupta told News18.com.

“Given how people invest in crypto with little knowledge and more influence, one must appreciate these regulations as they will only help secure investors’ money,” he said.

Experts agreed that investing in cryptocurrencies was never a ‘safe’ option per say, as they are subject to risk and volatility — as we have been seeing since the beginning of January. Bitcoin, for example, is trading at a value of $21,000 right now. This same crypto coin was scaling new highs during the second part of 2021, when it made a record of reaching almost $69,000 in October.

“With the trading volumes dipping the Investors may be re-assessing their cryptocurrency investments. Risks and volatility in the cryptocurrency market is not a new occurrence,” noted Rishi Anand, partner at DSK Legal.

“Given that volatility and risk in the cryptocurrency market, more or less, have been present ever since, it is pertinent to note that, while investments may or may not be safe from a market price perspective as of date, cryptocurrency trading or investment has not been barred or declared illegal by operation of law,” added Chopra.

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