After downplaying the rise of cryptocurrencies as an investment medium for years, the government finally decided to impose a flat 30% tax on cryptocurrency trades, along with a 1% TDS for the same. Three years down the line, the government has now realised this isn’t enough, as traders and exchanges have been quick to exploit a loophole that has emerged due to unclear regulation- Futures and Options trading.
The Loophole
On leading cryptocurrency exchanges, traders can opt for cryptocurrency futures, which aren’t taxed like spot trades. Even though they carry a bigger risk, that is offset by lower taxes charged.
For instance, a trader who earns a Rs.5 lakh profit has to pay Rs.1.5 lakh in taxes. If the trader does the same transaction through F&O, he has to pay just 5% in taxes or just Rs.25,000 in taxes. That’s just 16% of the taxes to be paid for a conventional trade.
A risky shift in trading
This has fuelled a risky surge in crypto derivatives trading. Many platforms are now seeing a spike in F&O crypto trading, similar to that of the stock market, which the SEBI barred through its updated regulations.
As there are no caps on losses, there is always the fear of stock market investors eventually making their way to the crypto markets, forcing the government to act accordingly.
Tax evasion concerns
Even though the government earned Rs.706 crore from these taxes, the loophole will require the government to include crypto derivatives in the definition of Virtual Digital Assets (VDAs) in Sec 2 (47A) of the IT Act. Once that’s done, the tax arbitrage that the loophole provided will be gone, and the government could earn more through cryptocurrency. Yet, regulators will have to work with global agencies to stop criminals from using the system to transfer funds across borders.
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