Cryptogram-06MAY2022

How to deal with India’s crypto tax regime

06 May 2022

In this issue

Hello,Welcome to the very first issue of Cryptogram, an India-focused weekly newsletter on blockchain tech, global crypto markets and Web 3.0 technologies, which promise to change our future. We are very excited to kick this off!Every Friday, we will look back at events from the week that just went by and tell you how to process all that information. Our aim is to move past the everyday market noise and educate you about crypto policies, strategies and the underlying technology.

This newsletter is put together by Giottus Crypto Platform and The News Minute’s brand studio. Subscribe to the newsletter here, if you haven’t already.

THE BIG STORY

How to deal with India’s crypto tax regime

Unfortunately, we have to start with damage control: how does the average crypto investor deal with India’s (really discouraging) crypto tax laws?Some context first. In her budget speech in February this year, Union Finance Minister Nirmala Sitharaman had announced a 30% tax on all crypto assets. People complained about the steep tax, but this signalled that the GoI was steering away from banning crypto altogether and moving towards legitimising the ecosystem, so it was considered a step in the right direction.And then a major bomb dropped in March.In response to a question in the Lok Sabha, the government clarified that investors will not be allowed to offset gains from one cryptocurrency against losses from another. This means that starting April 1, if you made a profit of Rs 100 from a trade on one cryptocurrency and a loss of Rs 100 on another, you will still have to pay Rs 30 as tax on the Rs 100 profit you made. So while in reality you made no money, because of the tax you will make a loss of Rs 30.

The government is not treating all cryptocurrencies as one asset class but each cryptocurrency as a different one. This is not how the government treats the stock market, where you can offset gains from one trade against the loss in another.Many reasons why this is badThis has surely discouraged crypto investors. We were already saddled with a 30% tax on all profits and there were no subsidies for holding assets in the long-term. And now this.Apart from creating a large hole in our pockets, there are a few other reasons why this is bad for the markets and for retail investors.One, the present crypto tax regime doesn’t encourage long-term investing. With no incentives to hold an asset for long, all investors will tend to invest like traders, making short-term trades and booking profit. This will only increase market volatility.Two, investors cannot diversify risk by choosing multiple assets and will have to settle for the ones for which they know the prices will go up definitely. No more baskets, no more diversification.This lack of diversification within crypto portfolios also means that Indian investors may miss out on future growth stories in crypto that international investors can avail of.It has also been clarified that hardware costs associated with crypto mining cannot be deducted as cost of acquisition of crypto assets – so, crypto mining in India just became less profitable. Blockchain companies will not be incentivised to set shop in India and create new jobs, as a result of which our country will likely lose out on innovation and leadership in the space.What investors can doWe hope and pray that the Indian government will change its mind, but in the meanwhile here are a few suggestions for investors.One, stick to the blue chips – Bitcoin and Ethereum are likely to grow with time and continue to exist years from now. By keeping most (>90%) of your crypto portfolio in these assets, you can mitigate risks with respect to crypto that cease to exist. Two, avoid frequent trades and don’t sell at a loss – by reducing the number of trades, you are ensuring that you play the patient game where it is more likely that each crypto you own can be profitable. You will not realise a loss unless you sell. If the asset grows to new all-time-highs later, you will miss out.And three, have targets for each investment and take out when profits are achieved – don’t shy away from taking profits frequently so that you benefit from market volatility. Ensure that each of your investments has a target price. Once achieved, take out the profits.

  THE TOP FIVE 

Stories from this week you cannot miss

1. Iconic fashion brand Gucci will begin accepting cryptocurrency in some of its U.S. locations later this month, with plans to roll out the program to other North American stores this summer.2. Goldman Sachs offered its first ever lending facility backed by Bitcoin, in a significant step for a major U.S. bank that accelerates Wall Street’s embrace of cryptocurrencies. 3. A group of investors including Sequoia Capital, crypto exchange Binance and asset management firm Fidelity, has invested over $7.1 billion to back Elon Musk’s $44 billion bid to acquire Twitter.4. Algorand will be a "regional supporter" for North America and Europe at this year's World Cup and an official sponsor of next year's Women's World Cup.5. Argentina's largest private bank, Banco Galicia, is making available to customers purchase, sale and custody of four different cryptocurrencies—Bitcoin, Ethereum, USD Coin, and XRP.

  EXPLAIN, PLEASE 

Demystifying the world of cryptocurrency

This week, we explain HASHRATE. As you may already know, a blockchain is a decentralised network. This means that a large bunch of people have to come together to process the transactions on that network. The strength of a blockchain is based on how decentralised it is – more number of individuals (or nodes) processing the transactions, the more decentralised it is. More decentralisation is better for a blockchain because it makes it harder to attack and compromise the network. How can we measure the decentralisation of a network? One of the ways is to measure how much computing power is being used by a network to process those transactions – and that’s what hashrate is. Hashrate is measured in number of calculations performed per second, which can be billions, trillions, quadrillions, and quintillions. Higher the computing power, more is the decentralisation generally speaking, and thus more is the safety. So, hashrate is an important metric used by crypto investors to measure the safety of a blockchain. You can read more about hashrate here.

That’s all for this issue, folks! Don’t forget to share this newsletter with fellow-crypto enthusiasts, and spread the word about us!Have a great weekend, and see you next Friday.Tell us what you think about this newsletter. Write to us at [email protected].