Crypto Exchanges: Crypto Industry Expects Growth To Lose Edge In FY23

Mumbai: Retail investors and crypto-trading exchanges are bracing for slow growth as the new tax regime governing virtual digital assets (VDAs) takes effect from Friday, April 1. Retail investors also settled their positions to make up for losses they may have incurred in the previous fiscal year, industry executives told ET.

The Finance Bill 2022, which comes into force on April 1, also requires merchants to pay a flat 30% tax on capital gains made on VDAs. In addition, unlike other asset classes, retail investors will not be able to offset losses incurred by cryptocurrencies, claim expenses or acquisition costs, or benefit from a reduced slab for larger ones. long-term values ​​under the new tax regime.

Once the new standards are fully in effect, it will “likely impact volumes by at least 20-50%,” one crypto industry player said on condition of anonymity.

Last year, sustained investor interest led to a meteoric rise in volumes on crypto exchanges. According to industry estimates, India’s top five to six crypto platforms saw $70 billion to $100 billion in trading volume in calendar year 2021, with WazirX alone managing around $43 billion.

However, such growth is likely to shrink this fiscal year if tax provisions are not changed, industry executives said.

“Transaction volumes are expected to drop significantly after the new tax provisions come into effect. The full impact (will) be felt next year, when even ordinary people who have bought crypto will (feel) it,” said Meyya Nagappan, Head of International Tax at Nishith Desai Associates.

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Crypto entrepreneurs believe that if tax laws do not allow the deduction of expenses, it will discourage organized trading, leading to reduced liquidity in the market and stunted growth of the Indian VDA ecosystem.

“The lack of an opportunity to offset the losses of one VDA against the profits of another is an extremely difficult step and will drive more and more users out of the exchange ecosystem,” said Neeraj Khandelwal, co-founder of CoinDCX. “Traders align their positions before March 31, so depositing becomes easier.”

The new laws could also trigger a change in the trading behavior of the roughly 15-20 million retail crypto investors in India, most of whom are under the age of 28.

Bets on new coins may decrease and traders may stick to investing in the first 10 coins as they are relatively more stable. Furthermore, it could also lead investors to turn to decentralized exchanges and international exchanges.

Mrityunjaya Lala, a 20-year-old business student, said the 30% tax, which is “quite high”, may deter young investors. “I could get crypto-like returns trading futures and options and not have to pay 30% tax. As young traders, we are all prone to making mistakes because we are all learning. Now that we can’t exactly offset our losses with other currencies, it creates a big downside,” he said.

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Exchange executives are warning that an even bigger impact on crypto trading volumes will become visible when the 1% withholding tax (TDS) is levied starting in July. The industry – through the Blockchain and Crypto Assets Council, part of the Internet and Mobile Association of India, and startup industry body Indiatech – has lobbied the government to reduce the TDS at 0.01%, ET reported on March 15.

Along with a drastic drop in volumes, trading will become more expensive as liquidity providers on exchanges are likely to pass the 1% TDS on to traders, according to several industry executives.

“The market maker (liquidity providers) will add the 1% TDS to the price so that it is borne by the user. Buying crypto is going to get a bit expensive in India,” said one of the executives quoted above.

Sathvik Vishwanath, founder of crypto exchange Unocoin, said, “Traders will become cautious about buying and selling because if they are in a loss, they may not sell at all. The rules of the game have changed a bit and they have to plan accordingly.

Despite large-scale lobbying by crypto firms, influencers and evangelists to reduce TDS and tax slabs for traders, the Minister of Finance on March 25 approved the Finance Bill which included these tax standards.

“Industry has also not yet received the clarifications it requested on the implementation of the tax proposals, and this ambiguity may lead to operational hurdles. There is an urgent need for the government to release these clarifications before TDS comes into effect on July 1,” Ashish Singhal, co-founder and managing director of CoinSwitch Kuber, said in a prepared statement.

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Crypto Exchanges: Crypto Industry Expects Growth To Lose Edge In FY23


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