If 2021 was a dream year for the cryptocurrency market in India, the breakneck growth rate may prove more elusive in 2022. Earlier this year, the Indian government announced tax rates for virtual digital securities transaction. assets (VDAs). The industry breathed a sigh of relief when the announcement came in the form of reassurance and recognition.
It is not all smooth sailing, however, as cryptocurrency exchanges have already started witnessing a downward trend in trading volumes after the rules came into effect on April 1. As eight days have passed since the new rules came into effect, Indian cryptocurrency exchanges like WazirX, CoinDCX, BitBns, Zebpay, Koinbazar, among others, have started to see a significant decline in trading volume.
A high trading volume in March
Cryptocurrency exchange CoinDCX has seen fluctuations and a visible downward trend in trading volumes, but the exchange has not noticed any impact on its user base. According to Minal Thukral, SVP of Growth and Strategy at CoinDCX, trading volumes were on the higher side on March 31, but this is a common trend at the end of financial years.
"All investors and traders become active towards the end of the fiscal year to take full advantage of the tax collection provisions, and most investors also end up adjusting their positions before the start of the new financial year," Thukral said.
According to data from Coinmarketcap, CoinDCX had a transaction volume of $31,266,563, starting April 9 at 18:00 pm IST. The exchange currently sees 334,373 weekly visits and the average liquidity is 446.
After a drop in January and February, the global crypto market began to experience a recovery in March. As stated by Nischal Shetty, Founder, WazirX; there has been a 20-30% increase in March volumes compared to February. According to Coinmarketcap, WazirX had a trading volume of $32,317,893, with 1,196,721 weekly visits (as of April 9, 18:00 PM IST).
โWe are seeing strong global trends favoring cryptocurrency adoption, but we will have to wait for the Indian story to unfold. It is still premature at this point to predict anything with certainty. However, I think we will have an idea by the second or third week of April as to whether crypto taxes will affect the industry or whether people will continue to trade and not care too much about the changes,โ Shetty commented.
Shetty also noted that the number of vendors has increased nearly 30% recently. According to him, the increase in the number of sellers cannot be entirely attributed to the end of the financial year. Since the price of Bitcoin also increased 11% during the same time period, many traders could have adjusted their positions to record profits or minimize losses, Shetty noted.
โWhile it is too early to comment on whether investor interest in the crypto industry will weaken due to the new tax rules, we have definitely seen a lot of volume swings outside of Indian exchanges. Investors are still trying to understand and figure out the implications of the taxes and their long-term effects. We will have to wait and see how the crypto community handles it,โ CoinDCXโs Thukral said.
What does the new rule say?
In the February budget session, Finance Minister Nirmala Sitharaman introduced a 30% income tax on all VDA transactions, including cryptocurrencies and non-fungible tokens (NFTs).
โConsequently, for the taxation of virtual digital assets, I propose to establish that any income arising from the transfer of any virtual digital asset will be taxed at a rate of 30%,โ said the Minister of Finance.
Under the new rules, loss of an asset it cannot be offset against profit from other assets. Additionally, gifts of virtual digital assets are also taxable in the hands of the recipient under the new rules. Most importantly, a 1% tax deducted at source (TDS) will be imposed on all crypto transactions from July 1.
For example, if someone invests INR 1,000 in a crypto asset, say bitcoin, and sells it for INR 1,200 after some time, the investor will have to pay INR 60 tax on the INR 200 he has earned from the transaction, following the new tax rule.
The government later further clarified that any loss from one crypto asset will not be counted against income from other crypto assets. Furthermore, the cost incurred in creating infrastructure will also not be counted as the cost of acquisition when taxing income from crypto mining, the government said.
Fearing the adverse impact of the rules, many of the influential financial exchange founders have spoken out against such measures by the government. After the government announced that one loss cannot be offset by another, Ashish Singhal, Co-Founder and CEO of CoinSwitch Kuber, said that this move is detrimental to the Indian crypto industry and the millions that have invested in this emerging asset class. , according to NDTV. report.
Aditya Singh, co-founder of Crypto India, started a petition urging the government to reconsider and reduce the tax on cryptocurrencies. The petition has collected 1,03,544 signatures to date.
The Crypto Industry contributes significantly to the country in the form of providing employment, FDI, GST and tax revenue to the GOI. GOI should aim to bring favorable crypto tax policies and encourage this industry not to discourage it while mitigating risks.#Reducecryptotax
โ Aditya Singh (@CryptooAdy) April 8, 2022
The TDS provision may be more damaging to the market
CoinDCX's Thukral stated that they expect the real impact on trading volumes to come from the 1% TDS provision. CoinSwitch Kuber's Singhal also echoed a similar sentiment about the arrangement.
โHigh-frequency traders provide liquidity in the crypto market, allowing for the efficient buying and selling of assets. These traders operate on extremely thin spreads, and locking up their capital with a high TDS will restrict their ability to trade, reducing market liquidity and eventually hurting retail investors,โ Singhal said.
While Praveen Kumar, founder and CEO of Belfrics Group, believes it is rather premature to comment on the impact on traded volume based on the new tax rules, he also added that the uncertainty in the TDS rules has affected the creators of market and intraday traders. .
โThere is still a lot of confusion regarding TDS and income tax, which will affect trading volume in the long run,โ Kumar said, claiming that there have been no changes to Belfrics user registration.
Will the new tax rules drive users to decentralized exchanges?
Since retail investors may look for other options, there are chances that they will opt for decentralized exchanges. These exchanges work in a decentralized manner and allow users to use peer-to-peer (P2P) transactions without third-party interference.
According to Kumar, it will take a few more weeks to assess the volume shift from centralized exchanges to decentralized markets. Although centralized exchanges in India have created more buzz in India, decentralized exchanges like Uniswap, Pancakeswap, Compound have also attracted some traders. However, even amid talk of stiff crypto taxes, international crypto exchange Coibase has made its crypto trading services available to users in India earlier this week.
