Budget 2024: From Tax Cuts to Regulatory Clarity, Here’s What the Cryptocurrency Industry Expects

The cryptocurrency industry has several key expectations from the upcoming Union Budget, including a reduction in transaction taxes, the possibility of loss offsetting, equal treatment of capital gains from crypto assets and other sources of income, and the establishment of a supportive regulatory regime.

The Budget 2022-23 introduced provisions to tax gains from virtual digital assets (VDAs) or crypto assets at a flat rate of 30%, irrespective of an individual’s income tax rate. Additionally, a 1% tax deductible at source (TDS) has been levied on any transfer of such assets.

Despite the introduction of new regulations, the government has failed to clarify the legality of these assets, something the industry has long demanded.

“As the government gears up for the upcoming Union Budget 2024-25, we urge it to create an enabling regulatory and tax environment that supports a growing digital economy and encourages innovation. The current tax framework for Virtual Digital Assets (VDAs), introduced over two years ago in the February 2022 Budget, has led to unintended consequences even for the government and the national exchequer, mainly through a massive shift of VDA transactions to offshore platforms, which has implications for tracking and monitoring such transactions,” said Ashish Singhal, Co-Founder, CoinSwitch.

Rajagopal Menon, Vice President, WazirX, expects a reduction in Tax at Source (TDS) on VDA carryforwards, loss set-off and carry-forwards, and also on VDA income in the upcoming fiscal 2024-25.

TDS reduction when transferring VDA

One of the major demands is to reduce the tax deductible at source (TDS) rate on transfer of Virtual Digital Assets (VDA) under Section 194S to 0.01%. Currently, the higher TDS rate of 1% acts as a deterrent to investors, leading to reduced market liquidity and participation. Reducing the TDS rate would encourage more transactions and foster a healthier trading ecosystem. It is also recommended to revise the tax deduction threshold under Section 194S, increasing it from ₹50,000 to ₹5,00,000.

Settlement and transfer of losses

The cryptocurrency community advocates for the ability to offset and carry forward losses, similar to other sectors. Currently, losses from VDA trading cannot be carried forward to offset future gains from VDA or other sources of income, discouraging long-term investment and strategic trading. Allowing this flexibility would bring the cryptocurrency market in line with other financial markets, promoting a more stable and investor-friendly environment.

Equal treatment of income from VDA

Another significant request is to treat VDA transfer income on a par with existing sources of income. This involves recognizing and taxing cryptocurrency income in a similar way to traditional forms of income, such as stocks or mutual funds. Such a change would simplify tax compliance for cryptocurrency investors and help legitimize cryptocurrency as a mainstream asset class. Additionally, amending section 115BBH to reduce the tax rate from 30 percent to a rate comparable to other industries would be a welcome improvement.

Regulatory Authority Summons

In addition to the aforementioned financial adjustments, there is growing support for the establishment of a dedicated regulatory body to oversee cryptocurrency transactions. Such an institution would ensure transparency, protect investors, and provide clear guidelines for compliance, thereby strengthening trust and stability in the market.

While the industry has welcomed the definition and inclusion of VDA in the Income Tax Act, certain provisions — such as high TDS rate and lack of offset — have led many Indian VDA users to migrate to non-compliant currency exchanges for their transactions, exposing them to the risk of losing their investment and breaking the law, resulting in reduced tax revenues to the government exchequer.

The RBI’s Financial Stability Report (FSR) of June 2024 highlighted the financial stability implications of decentralised finance (DeFi), which is in line with global regulatory efforts to create a safe and stable environment for digital assets. As the Union Budget approaches, taking into account these insights by establishing a robust regulatory framework within SEBI or RBI can help mitigate stability risks in the DeFi and digital asset space, ensuring that India remains competitive in this emerging global market.

The cryptocurrency community remains hopeful that the Ministry of Finance will consider these proposals, leading to positive outcomes in the Union Budget 2024-25. Implementation of changes such as reducing TDS and allowing for loss settlement and carry-forward would encourage wider participation in the cryptocurrency market. A supportive regulatory environment is crucial to drive innovation as it enables the industry to transform existing businesses by integrating blockchain technology.