Solving the complexities of computation in crypto taxation

Synopsis

Unlike the conventional financial markets of equities, crypto investors trade across 8-10 main crypto exchanges that are registered in India, as well as 3-4 primary international exchanges. For those investors that rely on these registered exchanges in India (including a few international exchanges), they are their gatekeepers to access crypto assets.

India’s crypto investor base witnessed explosive growth over the last 2 years, with recent estimates suggesting over 20 million crypto investors in India. India’s decision in February 2022, to explicitly identify crypto and other virtual digital assets (VDA) for taxation led to initial panic in the industry.India was to start taxing gains on VDA investment activities at a flat 30 per cent rate from 1st April 2022. Additionally, the government announced the imposition of tax deducted at source (TDS) from 1st July 2022; the onus of which was largely placed on the crypto exchanges operating in the country.

While there have been some hawkish comments from policymakers (including the RBI) on crypto trading and its exposure at an individual investor level, we believe such attention was largely directed towards creating adequate investor protection checks and balances and managing systemic risk across the entire crypto ecosystem. Such policy concern is welcome if it leads to stability and greater transparency and accountability for the industry to prosper in the long run.

The government has yet to explicitly grant legal status to VDAs, while the reality of taxation is well upon us. Even before the policy action in February 2022, prudent crypto investors were filing tax returns based on their interpretation of what is deemed income or capital gains for the tax year ended 31st March 2022 and 2021. In many instances, such computations of tax liabilities were either grossly overestimated or underestimated.

Unlike the conventional financial markets of equities, crypto investors trade across 8-10 main crypto exchanges that are registered in India, as well as 3-4 primary international exchanges. For those investors that rely on these registered exchanges in India (including a few international exchanges), they are their gatekeepers to access crypto assets.

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View Details »The complexities of computation of taxes in the crypto world are well and truly appreciated when you look at the various investor use cases that need to be factored in to arrive at an accurate assessment of tax liabilities for each crypto investor. This is a way smart technology solutions to aid the tax computation process play a vital role to deliver peace of mind to the crypto investor.

There is a clear symbiotic relationship between crypto exchanges and crypto tax platforms. The former is the aggregator of individual crypto trading accounts, while the latter can crunch the transaction history data in each of these crypto trading accounts to deliver peace of mind when it comes to tax computation.

Investors increasingly want to track their tax liabilities in real-time, not only on their respective individual crypto trading accounts but also get a consolidated view of their tax liability if they maintain multiple crypto accounts. Our estimates suggest, on average, each crypto investor in India maintains between 2 to 3 crypto trading accounts.

Crypto exchanges stand to benefit in the form of crypto investors appreciating the transparency and are comfortable getting back into trading more frequently. It is worth pointing out that the policy action in February 2022 led to an 80% decline in trading activities across crypto exchanges as the tax uncertainty spooked the investor community.

The crypto investor is not a tax specialist and needs specialist advice or solution. Given their high frequency of putting on trades (understandable in times of high price volatility) and the complexities around gain calculations that involve (a) tracking each transaction based on type, date, time, and size; (b) applying first-in-first-out (FIFO) logic for gain calculation; (c) ensuring costs of each purchase or transfer (of a VDA asset) is explicitly recorded; (d) ensure currency conversion rates are applied on final tax computation in the case of purchases on international exchanges in US$; (e) proper tax treatment of staking, interest earned; forking, airdrops etc.

By delivering tax computation transparency and certainty, the crypto taxation platforms deliver significant peace of mind to crypto investors, which in turn helps them pursue their investment goals with a singular focus. From a crypto exchange perspective, solving the tax computation challenges leads to a more stable customer environment, where the focus is back on investing; it allows exchanges to innovate on product offerings as well as cater to the diversity of demand from their client base.

(Indy Sarker is the co-founder of TaxCryp Technologies)


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