Will 30% tax on digital assets trigger sell-off among cryptocurrency investors?

The union finance minister’s announcement of taxing virtual digital assets at 30 per cent,in addition to 1 per cent tax deducted at the source (TDS) has sent ripples through the cryptocurrency ecosystem, even as the crypto exchanges remain confident that this is a first step towards legalisation of the digital assets.
 
The immediate impact on the cryptocurrency trading in India, as per experts, will be hard to gauge especially since there still remains a ambiguity over whether the 30 per cent tax rule will be effective in retrospect or will come into force next financial year.
 
With the  various cryptocurrency prices not at an all-time highs currently , the experts predict that a sell-off immediately may not occur in Indian markets , but the investors could take a holding position.  Crypto investors are also wary of the provision that states that any loss during the transfer of virtual digital assets will not be set-off.
 
“This has definitely made investor community a worried lot. The implications will be that if I want to sell my cryptocurrencies at a lesser price than the cost of acquisition, I will still be paying the taxes. This is definitely huge wealth erosion. The better stance would be rather holding the crypto long-term,” an investor said during a Twitter spaces session with the WazirX CEo, Nischal Shetty on Tuesday.
 
Shetty said that the crypto investors should adopt a wait and watch mode, not to resort to any panic selling, especially till the time a fine blueprint of the concerned regulation is available.

According to the finance bill, 2022 tabled by the union finance ministry in parliament on February 1, the virtual digital assets  tokens generated through cryptography and traded electronically, and NFTs, which will be taxed at the rate of 30 per cent for every transactions. This 30 per cent excluding the cost of acquisitions.

“Retrospective or not, this is an evolutionary process for creating a long-term sustained tax framework, and this is the first step. What matters is that the Crypto is legalised, now is the granularity of its transaction, impact, taxation and different holding period implications. Crypto investors have seen significant up and down cycles in the last 24 months itself, so in perspective of the current Tax announcement, we would not see any direct sell off wave at all, on the contrary this will divert the mindset to buy and hold longer term and treat is as a true investment instrument, instead of speculative trades,” said Keyur Patel, Co-Founder & Chairman, GuardianLink.io and Co-Founder, BeyondLife.club.
 
Patel added that it will be difficult to track or trace the previous sales due to the complexities of trade.

Agrees Atharva Sabnis, a member of the Member of Blockchain and Crypto Assets Council (BACC) and Founder & CEO, NFT Labs,Inc.

“The 30 per cent tax may have risked a panic sell-off for booking profits in case people assumed that it would only go in effect in Fy22-23. However, since the taxation is being interpreted as applicable retrospectively, and since global crypto markets are far away from their 2021 highs, a panic sell-off is unlikely to happen or sustain at scale. Having said that, there still lingers the risk of a panic sell-off after presentation of crypto bill in the Winter session,” Sabnis added.
 
Amit Nayak, CEO & Co-Founder of Sahicoi said that rather than a sell-off, it is reasonable to expect to see more participation from retail as well as institutional investors who have been sitting on the fence. "However, volumes will decide the impact on the price of digital assets. Moreover, we might see financial institutions framing policies to benefit from this wave and hence the long-term outlook is positive. Regarding 30 per cent tax rule, the finance ministry has not commented on the applicability of this retrospectively hence we shall wait for the govt to announce further information as the regulation gets implemented,” Nayak added.
 
According to Abhishek Malhotra, Managing Partner TMT Law Practice, the investors may sell digital assets in view of impending tax incidence, beginning AY 2023-24.

“This gives the investors a breather and there might not be a large drive towards dumping the assets. We may actually see a rise in people investing more in this. The intention of the government is to tax this new class of asset, “virtual digital asset”, alongside the official digital currency, which is slated to be rolled out by 2022-23," he said.
 
Why NFT holders may be better-off than crypto investors?

Patel of the NFT marketplace GuardianLink.io argues that each system has developed taxation over years.

“This is the first year for crypto and NFT tax framework in India and also for many other countries. 30 per cent is slightly steep, but in NFT specifically the gains are exponential and when you have a buyer who is gaining 300 to 600 per cent in profits, taxing 30 per cent is affordable. Also, NFT cycle time from buy to sale is short, less than 90 days, and one can afford slightly steep taxation for such gains. Eventually, we believe worldwide tax implications will be unilateral at around 18 to 20 per cent. There will be no direct impact on NFT sales, we see no slowing down of the momentum,” he added.