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Apart from reducing the tax deducted at source (TDS) rate on crypto's transfer from the current 1 per cent to 0.1 per cent, the Centre must set up a regulator for the industry much like the Securities and Exchange Board of India (Sebi) in the upcoming Budget 2023, experts told Business Standard.

Currently, a person is mandated to pay a 30 per cent tax on withdrawal and an additional 1 per cent TDS on the transfer of crypto assets in India. It was introduced in the last Budget by Finance Minister Nirmala Sitharaman.

“Through our representation for the upcoming Union Budget 2023–2024, we have suggested that the rate of TDS be brought down to 0.01 per cent,” said Sumit Gupta, co-founder and CEO of crypto investment firm CoinDCX.

According to Rajagopal Menon, vice-president at crypto exchange WazirX, 1 per cent TDS “has had a crushing effect on day traders and short-term investors' capital”. It has also pushed Indian investors to foreign exchanges.

“Exchanges out of India do not have to follow this regulation and as such, such a high TDS rate discourages investors to trade in the Indian exchange,” said Ankit Jain, partner at chartered accountancy firm Ved Jain & Associates.

The “purpose of TDS is to create the trail of the transaction and the same can be achieved by reducing tax rate also, while simultaneously helping the traders also by not blocking their capital,” he added.

Regulator like Sebi, RBI

The meltdown of FTX has brought forth the dangers of an unregulated industry. According to the latest estimates, the money of 9 million investors might have been lost in the collapse of the exchange. In India, the industry is still unregulated and the Reserve Bank of India (RBI) governor Shaktikanta Das does not mince his words when it comes to digital currency.

At the Business Standard BFSI Insight Summit, Das said, “The term cryptocurrency, private cryptocurrency, is a fashionable way of describing what is otherwise 100 per cent speculative activity.”

The industry, however, believes that there must be regulations in place.

Jain said that the Centre should set up a regulator like Sebi or RBI to monitor cryptocurrencies.

“The rules should be clearly laid down in terms of procedures, technical security and the precautions such exchanges need to take to ensure that an event like FTX doesn't happen with Indian exchanges. These exchanges now need to be treated at par with stock exchanges or banks and should have adequate safety mechanisms in place to ensure that the wealth of the investor remains protected,” he said.

According to Ashish Singhal, CEO and co-founder of another crypto exchange CoinSwitch, the absence of comprehensive regulations, “makes the mechanism [tax] counter-productive”.

Adithya Reddy, a New York-based international tax advisor said that due to a lack of regulations, investing in cryptocurrency carries risks for investors.

“Unregulated cryptocurrency markets are risky, and it is recommended that investors should exercise caution before investing. As a result, proper regulation by the government will boost investor confidence; however, if not properly regulated, it may lead to illicit terror financing or other illegal activities,” he said.

‘Allow offsetting losses'

Some industry experts also suggested that gains in the crypto industry should be allowed to be offset against losses. This was done away with by FM Sitharaman in the last Budget.

“Gains should be allowed to be offset against losses. It will only encourage more retail participation,” said Edul Patel, CEO and co-founder of crypto platform Mudrex.

WazirX's Menon agreed. “There is an urgent need to classify VDA as a regulated asset class, similar to securities, and to bring taxation on parity with equity shares/derivatives by allowing set off/carry forward of losses,” he said.

Apart from reducing the tax deducted at source (TDS) rate on crypto's transfer from the current 1 per cent to 0.1 per cent, the Centre must set up a regulator for the industry much like the Securities and Exchange Board of India (Sebi) in the upcoming Budget 2023, experts told Business Standard.

Currently, a person is mandated to pay a 30 per cent tax on withdrawal and an additional 1 per cent TDS on the transfer of crypto assets in India. It was introduced in the last Budget by Finance Minister Nirmala Sitharaman.

“Through our representation for the upcoming Union Budget 2023–2024, we have suggested that the rate of TDS be brought down to 0.01 per cent,” said Sumit Gupta, co-founder and CEO of crypto investment firm CoinDCX.

According to Rajagopal Menon, vice-president at crypto exchange WazirX, 1 per cent TDS “has had a crushing effect on day traders and short-term investors' capital”. It has also pushed Indian investors to foreign exchanges.

“Exchanges out of India do not have to follow this regulation and as such, such a high TDS rate discourages investors to trade in the Indian exchange,” said Ankit Jain, partner at chartered accountancy firm Ved Jain & Associates.

The “purpose of TDS is to create the trail of the transaction and the same can be achieved by reducing tax rate also, while simultaneously helping the traders also by not blocking their capital,” he added.

Regulator like Sebi, RBI

The meltdown of FTX has brought forth the dangers of an unregulated industry. According to the latest estimates, the money of 9 million investors might have been lost in the collapse of the exchange. In India, the industry is still unregulated and the Reserve Bank of India (RBI) governor Shaktikanta Das does not mince his words when it comes to digital currency.

At the Business Standard BFSI Insight Summit, Das said, “The term cryptocurrency, private cryptocurrency, is a fashionable way of describing what is otherwise 100 per cent speculative activity.”

The industry, however, believes that there must be regulations in place.

Jain said that the Centre should set up a regulator like Sebi or RBI to monitor cryptocurrencies.

“The rules should be clearly laid down in terms of procedures, technical security and the precautions such exchanges need to take to ensure that an event like FTX doesn't happen with Indian exchanges. These exchanges now need to be treated at par with stock exchanges or banks and should have adequate safety mechanisms in place to ensure that the wealth of the investor remains protected,” he said.

According to Ashish Singhal, CEO and co-founder of another crypto exchange CoinSwitch, the absence of comprehensive regulations, “makes the mechanism [tax] counter-productive”.

Adithya Reddy, a New York-based international tax advisor said that due to a lack of regulations, investing in cryptocurrency carries risks for investors.

“Unregulated cryptocurrency markets are risky, and it is recommended that investors should exercise caution before investing. As a result, proper regulation by the government will boost investor confidence; however, if not properly regulated, it may lead to illicit terror financing or other illegal activities,” he said.

‘Allow offsetting losses'

Some industry experts also suggested that gains in the crypto industry should be allowed to be offset against losses. This was done away with by FM Sitharaman in the last Budget.

“Gains should be allowed to be offset against losses. It will only encourage more retail participation,” said Edul Patel, CEO and co-founder of crypto platform Mudrex.

WazirX's Menon agreed. “There is an urgent need to classify VDA as a regulated asset class, similar to securities, and to bring taxation on parity with equity shares/derivatives by allowing set off/carry forward of losses,” he said.