India's Crypto Tax May Curb Excessive Speculation, Bring Institutional Demand

The Indian crypto market may remain insulated from the next meme token frenzy as a result of the recently proposed tax on virtual currency transactions.

Earlier this week, Finance Minister Nirmala Sitharaman announced that profits from the sale of virtual assets would be taxed at a flat rate of 30% without any deductions or exemptions. The rate is on par with the highest income tax band, which applies to individuals earning more than 1.5 million rupees ($20,000) a year. The government also introduced a 1% tax, deducted at source (TDS), on cryptocurrency trading.

Observers said the steep tax rate might deter the gambling and excess speculation seen during the bull market frenzy of April, October and early November last year.

"We believe the taxation structure introduced by the government will certainly discourage speculators and punters," Suraj Ramakrishnan, a chartered accountant and member of the founding team at Mumbai-based crypto asset management firm MintingM, said.

While TDS might help the government keep a tab on the money flow, it could pose a problem for short-term traders.

"One percent TDS by government is a tactical move to get records/trail of all transactions which would bring exchanges and investors under better compliance. However, the TDS amount could turn out to be very high for frequent traders," said Ravi Jain, co-founder of Blostem Fintech.

High-frequency trading involves using powerful algorithms to conduct a large number of transactions in fractions of a second. Aditya Singh, a co-founder of Crypto India, said 1% TDS is too much, and with enough trades, an entity's initial account capital would be significantly depleted.

"With 1% TDS, a trader with an initial account balance of INR 100,000 can lose 10% of his money in just 11 transactions assuming these trades didn't generate profit and each transaction involved complete account balance," Singh noted in a Twitter chat.

Rajat Lalwani, a SHIB holder and moderator at Shiba Inu India Official, a Telegram group with more than 2,000 India-based retail investors, said the new tax structure is less of a concern for long-term holders.

"Most people who are unhappy right now are day traders. They book petty percentage profits, and this wouldn't go well with them," Lalwani told CoinDesk in a Telegram chat. "People holding for the long term will slightly be less worried than the day traders."

During the height of the meme token frenzy in October and early November, SHIB pairs accounted for nearly 50% of the daily trading volume on WazirX, a Binance-backed exchange based in Mumbai, and other platforms serving India-based clients. At the time, investors from smaller cities in semi-urban and rural areas were trading SHIB in a bid to make big profits in a short period.

The frenzy has cooled, and SHIB has crashed 75% from its October peak of $0.00008894. With the new tax structure, retail investors are likely to think twice before gambling during a meme token frenzy.

While several publicly listed companies in the U.S. have added bitcoin to their balance sheets, the Indian corporate world has stayed on the sidelines, perhaps due to regulatory uncertainty. That might change now.

"After clarity on taxation, we note that a lot of Indian institutions would look favorably at investing balance sheet money in the crypto markets," MintingM's Ramakrishna said.

While institutional investors dislike regulatory ambiguity and uncertainty, the recent announcement of tax rules has cleared the air to some extent. The move also indicates that the government may be warming up to the crypto sector and might be set to regulate top cryptocurrencies like investment assets.

Last year, the Ministry of Corporate Affairs asked all India-based companies to mandatorily disclose any dealings in cryptocurrency or virtual currency in their balance sheets. The move was widely hailed as the first step toward regulating the crypto markets.