How your life will change when crypto tax bill becomes a law
Cryptocurrency investments have always been seriously debated in India. In February 2022, Finance Minister Nirmala Sitharaman announced that Indians will have to pay a tax of 30% on gains made from the sale of crypto assets. The announcement received mixed reactions.
(The announcement felt like an unwelcome guest, who visits your home. You don't really like the guest, but at least you can sit and gossip with someone right?)
Nirmala Sitharaman's announcement was the first indication of the Modi government's acceptance of ''cryptocurrency''.
Indians are among the largest crypto traders in the world but the government has never publicly accepted cryptocurrency as something legal or welcome in India.
So when the government suddenly opened the door, but said ki pehle 30% dena padega, it hurt like hell.
But for investors, the happiness of someone finally opening the door in the first place after many years, was a big deal. Enough reason to be happy (even if you will now get to use only 70% of your crypto profits).
The crypto bill that was tabled in February 2022 during the Budget session, is being presented in the Parliament on March 25, 2022. Once passed, it will turn into law and be effective from April 1, 2022.
Here is how Pappu, a common Indian investor's life will change thanks to his affair with crypto:
In June 2021, 27-year-old Pappu quit his 5-year-old IT job in Ahmedabad to switch to a full-time profession of trading in cryptocurrency. His long-time dream had finally come true.
Pappu started his experiments with cryptocurrency in 2017 when he saw crypto prices bloom and the news on Aajtak caught his eye. "This could be profitable," he thought. Something called Bitcoin had just quadrupled to $20,000 and another cryptocurrency called ''Ripple'' had created a 5-time positive ripple in the market.
Now, spending Rs 5000 of his savings was not a big deal, but to spend Rs 30,000 was.
Also, what if the asset is banned? What then? He had no answer because the government had not mentioned anything about crypto till then. No rules, no laws, no clarifications. Nothing.
So he had no option but to be optimistic and move ahead in the hope that when the government comes up with some laws, he might get a chance to make good money. ''They might tax it between 10-15% because that's normal right?'' he casually soothed himself to get through those initial nerves.
He turned to this new crypto coach on Instagram, who promised many people that making money on crypto was damn easy and all. Those ads looked wow and were a relief.
He watched one video after stumbling across an ad, and the curiosity grew. He binged more videos and then even longer videos.
He turned to YouTube to officially learn more about the Bitcoin world.
He searched for: ''Everything you need to know about cryptocurrency'' and ''Crypto Trading: 5 things you need to know before you start trading''.
Pappu realised that he could even talk about these strategies with others when he learned that Pihu, his junior at work was also a crypto investor. Pihu was a younger and smarter colleague who had invested much more than him. She worshipped multiple Instagram crypto coaches who had helped her make more money than her monthly salary. She had also suffered losses, but she managed to ignore them casually, coz crypto was the future that would let her retire at 30!
Also, since gains on crypto were taxed on a slab rate basis initially, there was nothing to worry about for Pappu and Pihu. (Pappu was a part of the 20% tax slab while Pihu was at the 5% slab.)
Pappu was doing well and would learn the strategies and tricks of the trade post work hours and would apply them in reality during the trading hours. His learning translated into more profits in the wallet after several transactions. Pappu re-invested the profits and eventually invested about Rs 2,00,000 in crypto (Rs 1,00,000 in Ethereum and Rs 1,00,000 in Bitcoin).
On January 18, 2022, when the market fell drastically in a couple of days, his portfolio value reduced by more than half to less than Rs 1,00,000 from Rs 2,00,000. The falls were massive and his inability to book profits because of lack of experience and knowledge had cost him much.
Pappu panicked a bit but continued to learn and invest. About 6 months later, Pappu knew that he was now profitable.
But what is the point of making profits if you cannot encash it right? He made some efforts, tried to encash some of his profits and he found that they were encashable.
BUDGET 2022 COMES IN
When the Budget came in and news about the 30% tax rate flashed across the TV screens, he did not like it AT ALL. 30% was beyond expectations bro. Not done.
Also, before this news came in, everyone paid tax on gains from the sale of cryptocurrency as per the slab rate, provided the assets were sold during the FY 2021-22. Now that goes up to 30%!
But then he sat and thought: ''At least they won't ban crypto if they have taxed it 30% right?''
So he was happy that at least the government is recognising crypto and giving it some izzat instead of banning it and treating it as nothing. So there was hope.
Then came another news that messed up Pappu's emotions: The crypto losses will not be set off against gains.
Now, this was purely unfair.
Pappu had invested about Rs 1,00,000 in Ethereum and Rs 1,00,000 in Bitcoin.
In Ethereum, he had suffered a loss of Rs 40,000 while he had made a profit of Rs 1,50,000 in Bitcoin.
Now in an ideal scenario, he would have had to pay 30% tax on the NET profit of Rs 1,10,000 (profit Rs 1,50,000 less loss of Rs 40,000).
But now, the government's new scheme meant that profits will be taxed at 30% while investors have to bear their losses themselves without any help from the government.
Meaning now, Pappu has to pay tax on the entire Rs 1,50,000 and not consider the loss of Rs 40,000 at all in his calculation.
If say Pappu had a gain of Rs 50,000 from another income (say the sale of shares, or dividend or from any other business), he cannot set off this loss of Rs 40,000 from any of those gains too.
Bahut naa insaafi hai.
The naa insafi comes now when Pappu realises that he has to suffer the Rs 40,000 loss this year itself and cannot carry forward the loss to next year.
Meaning, if he profits by Rs 60,000 next year in Ethereum itself, he cannot set off the previous year's loss of Rs 40,000 against the next year's income of Rs 60,000. He has to again pay a 30% tax next year on the entire Rs 60,000.
Pappu has now lost interest in cryptos due to the depressing new laws.
After thinking about it, he now wants to get rid of it. What to do?
If he sells them in FY 21-22, he has to pay tax on gains as per the slab rate only.
But if he sells them post March 31, 2022, he will have to pay a tax of 30% on gains.
Also, he will additionally receive a 1% lesser on the sale price, since the exchange will now deduct 1% TDS on his sale price.
So, say he sells his Bitcoin investment for Rs 2,00,000, the exchange will deduct Rs 2,000 (1%*2,00,000), share it with the government and pay him the rest:
So his amount in hand will be:
SP: Rs 2,00,000
Less cost: Rs 1,00,000
Less TDS: Rs 2,000
Net: 98,000
Tax on Rs 98,000 at 30%: Rs 29,400 (excluding surcharge and cess)
What if Pappu wants to gift some cryptos to his girlfriend as a token of his so-called love and affection? Well, the girlfriend will then have to pay tax on it.
Weirdly, this has never been seen in any previous tax laws for any capital assets or stock investments in India.
This is the first time a tax as harsh as this has been imposed on investments. And we hope it's the last time.
Cryptocurrency can work well if it is governed well. If countries like Ukraine have used it to raise funds, there is no reason why India cannot use it to its advantage.