India decides not to go China's way of banning Bitcoin!

Yesterday India's Finance Miniter presented the Annual Financial Budget before the Parliament and the country. While the focus was on increased capital expenditure to boost India's GDP, cryptocurrency enthusiasts in India were excited about something else. The Finance Minister proposed the following taxations on cryptocurrency transactions -

1. Tax deducted at source (TDS) at the rate of 1% on payments made for transfers of cryptocurrencies or any other digital assets - NFTs, crypto, stablecoins, etc.
2. 30% tax on any income from virtual currencies - Capital Gains will be taxed at 30%, and income from gaming, blogging, vlogging, etc. all to be taxed at 30%. One cannot carry forward any loss. If one loses 30% in a year and then gains 100% the next year, books the gains by exiting the position, then in the second year one has to pay tax on 100% for that year, despite having made only 40% overall.

The government also said that the central bank will be coming out with its own digital currency but no one cares about that at this stage.

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The news above is a great piece of news for Indian investors. At least now, no one will be arrested for purchasing cryptocurrencies. If the government is taxing cryptocurrencies, then it can't tax something illegal. The government has no policy to tax recreational drugs. The investor community can breathe a sigh of relief.

However, not allowing one to carry forward losses and taking 30% of the profits is pretty evil. I think there needs to be more legal clarity on this. Taxing notional profits sounds bizarre, and taxing capital gains yearly can lead to investors paying excess tax in some years, as highlighted by an example above. In the reverse situation, if one makes 100% in year one, and then loses 10% in year 2, books the overall gains, then does that person pay no tax, since the year in which the position was exited is loss-making for that year? I doubt the government will allow that.

Some will of course evade taxes. Possibly P2P can help evade taxes for a while. Buying on exchanges requires one to follow KYC norms. Such taxation policies will also lead to a big black market for cryptocurrencies and subsequently scams. Not declaring income from mining, gaming, etc., can also flourish. The taxman will go through a nightmare because of this. Further regulations and laws around transactions will be established whenever the cryptocurrency bill comes to light. For now, let's just be happy that India has not gone China's way to ban cryptocurrencies!