India’s crypto tax will either send traders underground or back to stock markets, say experts

• India’s 30% crypto tax could push traders to find new and innovative ways to bypass paying the taxman.
• It could also push traders, and their capital, back towards the stock market where the tax rates are lower.
• With fewer people willing to engage with India’s crypto ecosystem, experts believe that developers too could migrate to find more crypto friendly countries to work on their applications.

India’s decision to tax all ‘virtual digital asset’ (VDA) transactions at 30% will either send crypto traders underground, back to the stock markets or push them to leave the ecosystem altogether, according to experts.

The taxman’s entry into the world of cryptocurrencies is a mixed bag. The industry at large has welcomed the move and the semblance of legitimacy it gives to the crypto sector at large — even though Finance Minister Nirmala Sitharaman strongly disagrees with that conjecture.

Meanwhile, executives are also aware that a tax this high is going to have a huge impact on how many users jump on the crypto bandwagon, going forward.

“You will have ramifications on the adoption and proliferation of crypto and blockchain startups in India. That will happen for sure,” Aritra Sarkhel, Director - Public Policy & Govt Affairs at the Indian crypto exchange WazirX, told Business Insider during a Twitter Spaces session.

Motivated crypto traders can find ways around the tax

The cryptocurrency ecosystem goes beyond trading, albeit that is the most popular aspect of the market. However, as a person who holds crypto, one can stake and lend coins to earn interest. Vauld, for instance, allows users to simply start a savings account which allows them to earn interest on the tokens they own without any exposure to the risks of the stock market.

Even if a person doesn’t own any cryptocurrency, they can still participate in the derivatives market — betting on whether the value of a cryptocurrency will increase or decrease. One would argue that’s even more speculative than actual cryptocurrency trading. But since no VDAs were actually exchanged, it’s unclear how these transactions will be taxed.

Short term traders could get pushed back to the stock markets

At the end of the day, the biggest players with something to lose when it comes to a 30% task on cryptocurrency transactions are the day-traders — individuals who invest in tokens for shorter periods of time, many conducting multiple transactions within a day.

As a result, the stock market may begin to look like a more profitable endeavour. “[The crypto tax] will spur more and more money coming back to the equity or other financial assets. This structural move has started,” said Vikram Kotak, the co-founder and managing partner at Ace Lansdowne Investments told Business Insider during an earlier interview.

If the number of crypto trades starts to dwindle, it will invariably have an effect on crypto exchanges within India as well.

Long term investors want to ride it out

While there’s a considerable amount of fear, uncertainty, and doubt (FUD) in the air, Badri and Sarkhel concur that most long term investors are prepared to ride it out. While the tax on crypto may be high, HODLers are optimistic due to two reasons.

First and foremost, India is yet to publish its crypto bill, which is likely to bring about more clarity on VDAs and other use cases of cryptocurrencies.

Second of all, the tax bill — in its current form — still requires clarifications in terms of what exactly can be offset, what constitutes a trade and other unanswered questions.

The crypto tax could ignite another episode of ‘brain drain’

India’s crypto tax is a heavy bill to pay for investors. But, it’s also a deterrent to the men behind the curtains building web3, the next generation of the internet built on the blockchain.

The domino effect of reduced adoption and proliferation of cryptocurrencies could worsen India’s ‘brain drain’ problem. According to a report by the United Nations Department of Economic and Social Affairs (UN DESA), nearly 10 million Indians migrated overseas between 2000 to 2020 in search of better education and employment opportunities.

“There needs to be further deliberation for the larger industry to coexist. If things like this [India’s crypto tax] happen, younger startups will move out to another country. You don’t want another brain drain to happen,” said Sarkhel.

All eyes on crypto

India is a major player when it comes to any industry because of the sheer size of its population. The same holds true for cryptocurrencies. After the Supreme Court upturned the Reserve Bank of India’s (RBI) order to ban cryptocurrencies from the country, there has been a boom of adoption.

In just the last year, crypto exchanges in India have seen their users grow multifold. Some experts reason that the surge occurred because of the COVID-19 pandemic leaving too much time in people’s hands. Others believe the boom was a result of investors looking for stronger options to hedge against inflation.

A third school of thinking attributes the current popularity of cryptocurrencies in India to latent demand. The two years of RBI’s ban kept many away from the cryptocurrency markets despite curiosity. After the ban was lifted, all the pent up demand burst through the surface. Tax or not, the growth of users on crypto exchanges in 2022 was going to be slower than before.

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