Following a period of extremely long uncertainty marked by the government’s and the RBI‘s pessimism toward virtual digital assets, a new tax structure for cryptocurrencies was ultimately unveiled in this year’s budget. And it went into effect last Monday, with the start of the new fiscal year. According to industry estimates, India has 15-20 million crypto investors with $6 billion in holdings.

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The industry saw the advent of a separate taxation structure as a relief since it gave cryptocurrency legitimacy. But it doesn’t appear to have been much of a relief.

The new regulations imposed a flat 30% tax on profits made from the transfer of crypto assets and NFTs, regardless of the holding period. Earnings from virtual digital assets are taxed in the same way as gains from gambling, lottery, or horse racing. Except for the purchase price, no deduction is permitted. If the value of the crypto gift exceeds Rs 50,000, it is additionally taxed at the slab rate.

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Apart from that, a considerably harsher Tax Deducted at Source (TDS) of 1% on every trade would be imposed from July 1 if the aggregate transaction value in the fiscal year exceeds Rs 50,000. The buyer must withhold the TDS on the seller’s behalf.

Experts believe that the TDS would drain liquidity from the market by requiring high-frequency traders to reduce their activity. Some even worry that the government’s move to prohibit the offsetting of trading losses in digital assets may result in a crypto firm’s exodus from India.

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New investors are flocking to the cryptocurrency market, seeing the tax as the government’s implicit acknowledgement of the asset class.

In a certain way, the tax ends the perpetual uncertainty that has plagued the industry in India for the past half-decade. The sector applauded the move while lamenting the high taxes that threaten to exacerbate the brain drain and impede innovation.

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Experts have underlined the impracticality of implementing the TDS rule, particularly on international exchanges and in the situation of crypto-to-crypto trades when the buyer is unknown.

Given the nature of the sector, which adheres to the decentralised ethos, implementing the TDS becomes difficult. Because the TDS would reduce liquidity on exchanges, investors will not receive the best pricing or the quickest execution of trades.

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Individuals with resources, high-frequency traders, start-ups and entrepreneurs in the cryptocurrency and Web 3.0 ecosystem are increasingly being pushed to relocate their operations to crypto-friendly countries such as Singapore and Dubai in the UAE.