Solving the Computational Complexities in Crypto Taxation

India’s crypto investor base has grown explosively over the past 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 (VDAs) for taxation caused initial panic in the industry. India was to start taxing gains on VDA investment activities at a fixed rate of 30% from 1 April 2022. Additionally, the government announced the imposition of withholding tax (TDS ) from July 1, 2022; whose burden largely rested on the crypto exchanges operating in the country.

While there have been hawkish comments from policy makers (including the RBI) about crypto trading and exposure at an individual investor level, we believe such attention has largely been directed towards creating adequate checks and balances for investor protection and systemic risk management across the crypto ecosystem. . Such political concern is welcome if it leads to stability and greater transparency and accountability for the industry to thrive in the long term.

The government has not yet explicitly granted a legal status to the VDAs, while the reality of taxation is there. Even before the February 2022 political action, cautious crypto investors were filing tax returns based on their interpretation of what is considered income or capital gains for the tax year ending March 31, 2022. and 2021. In many cases, these calculations of tax liabilities were either grossly overestimated or underestimated.

Unlike conventional stock financial markets, crypto investors trade on 8-10 major crypto exchanges registered in India, as well as 3-4 major international exchanges. For investors who rely on these India-registered exchanges (including a few international exchanges), they are their gatekeepers to access crypto assets.

The complexity of calculating taxes in the crypto world is well and truly appreciated when looking at the various investor use cases that must be considered to arrive at an accurate assessment of each crypto investor’s tax liability. This is how smart technological solutions to facilitate the tax calculation process play a vital role in providing 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 analyze transaction history data in each of those crypto trading accounts to provide peace of mind when it comes to tax calculations.

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

Crypto exchanges stand to benefit in the form of crypto investors appreciating transparency and feeling comfortable returning to trading more frequently. It should be noted that the political action in February 2022 led to an 80% drop in trading activity on crypto exchanges as tax uncertainty spooked the investment community.

The crypto investor is not a tax specialist and needs specialist advice or a solution. Given their high frequency of trades (understandable in times of high price volatility) and the complexity of gain calculations which involve (a) tracking each trade by type, date, time and size ; (b) applying first-in, first-out (FIFO) logic for the calculation of the gain; (c) ensure that the costs of each purchase or transfer (of a VDA Asset) are explicitly recorded; (d) ensure that currency conversion rates are applied in the final calculation of tax in the case of purchases on international exchanges in US dollars; (e) the appropriate tax treatment of staking, interest earned; bifurcation, parachute drops, etc.

By providing transparency and certainty in the calculation of taxes, crypto tax platforms offer great peace of mind to crypto investors, which helps them pursue their investment goals with careful consideration. From a crypto exchange perspective, resolving tax calculation issues leads to a more stable customer environment, where the focus is once again on investing; it allows stock exchanges to innovate on product offerings and respond to the diversity of demand from their customers.

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



Sharon D. Cole