Will crypto trading on decentralized exchanges help you avoid 30% tax?
While there is no legal way to avoid paying 30% tax on income from cryptos and other virtual digital assets, several false claims about how to avoid crypto tax are making the rounds on social media. One of these claims is that trading on decentralized exchanges allows you to avoid paying taxes on crypto income.
In theory, trading on decentralized exchanges can aid in avoiding tax implications. However, it may not be legal. Consider this a loophole for which the government may soon issue a clarification.
Because cryptocurrency is not yet a legalized and widely used mode of payment, you can still profit from your investments and trades by converting the income into fiat currency. Individuals must have access to a banking channel in order for tax authorities to track down the source of money.
“While one may argue that tax implications can be avoided by transacting on decentralized exchanges due to their business model, it would not be legally tenable to take any action based on such a view given that the government appears to intend to tax gains arising from the sale of cryptocurrencies, regardless of whether it is transacted on a centralized or decentralized exchange.”
“If you own a crypto asset and earn a profit from its trading/sale, you must pay 30 percent tax on the profit without any deduction.” “The mode and manner of sale/trading will have no impact on the incidence of taxation,” Sameer Jain, Managing Partner of PSL Advocates & Solicitors, explained.
“However, because it is a direct C2C transaction with no intermediary, the requirement of deducting and depositing 1% TDS on each transaction may not apply.” Thus, if the assessee does not self-declare, the transactions may pass unnoticed by the Taxman, but the income is still taxable. “Hiding profits earned through DEX trading may result in the imposition of a penalty and interest,” he added.
Section 115BBH of the Income Tax Act, which was recently added, states that income from the transfer of any virtual digital asset (VDA) is taxable at a rate of 30%.
“A loophole may be found in the existing tax regime by using Decentralized Exchanges (DEX), Decentralized Autonomous Organizations (DAO), or exchanges that are not located within the reach, accessibility, or jurisdiction of the Indian authorities, it is worth noting that no such exception has been carved out in law with respect to the income of the concerned assessee, who, unlike such DEXs or DAOs, would be subject to Indian jurisdiction and would most likely be.
According to Aditya Chopra, Managing Partner of Victorian Legalis-Advocates and Solicitors. Because of the stringent crypto tax regime, many Indian crypto exchanges and companies are relocating their operations to places like Dubai or Singapore, which have crypto-friendly tax regimes.
However, Indian investors should be aware that the Government of India’s announced 30% tax is not based on the location of the exchange. The rule is straightforward: If you earn money, you must pay taxes on it.
“Investors should keep in mind that the tax regime in India is not based on the location of crypto exchanges.” “Any crypto exchange providing service to Indian customers with their base outside India would not exempt Indian Investors from tax regime as it is irrespective of the location where the crypto exchange trading is done,” said Utsav Trivedi, Partner at TAS Law.
According to Rishi Anand, Partner at DSK Legal, it is unlikely that Indian investors will receive any tax relief or exemptions even if the crypto exchange on which they are trading relocates its operations outside of India.
“Until further clarifications from the government, the tax would be levied on funds or any gains repatriated to India on sale of any crypto by an Indian resident,” Anand explained.
Tax experts have been debating whether cryptocurrency should be classified as a ‘currency’ or an ‘asset.’ The terms cryptocurrency and crypto-assets are frequently used interchangeably.
However, classifying it as a ‘currency’ requires legal backing from the government; in the absence of such legal backing, it is safe to classify it as an ‘asset/property.’
Because cryptocurrency has not yet been legalized by the Reserve Bank of India (RBI), it cannot be exempt from taxation. Profits from the sale of cryptocurrency must be taxed by the investor.
Except where expressly exempted by the Income Tax Act, all income is subject to taxation. Investors must pay income tax on crypto-transactions based on the nature of the transactions until we receive clarification from the income tax department.
Gains on crypto-transactions would be taxable as business income or (ii) capital gains under standard income tax rules. This classification will be determined by the investors’ intent and the nature of the transactions.
Gains from cryptocurrency transactions will be taxed as ‘business income‘ if there are frequent trades and high volumes.
They will, however, be taxed as ‘capital gains’ if the primary reason for owning them is to benefit from longer-term value appreciation with fewer trades.
The supply of goods or services, or both, is a taxable event for GST purposes. The concept of supply is broad and covers a wide range of transactions.
Anything other than goods, securities, and money is defined as services.’ It includes activities involving the use of money or its conversion to cash or any other mode for which a separate fee is charged.
Given the above definition, GST may be levied on the purchase and sale of cryptocurrencies as a supply of goods or services.
The Central Economic Intelligence Bureau (CEIB) has proposed classifying cryptocurrencies as intangible assets and charging GST on all cryptocurrency transactions. Because the government has not yet defined its taxability.
According to Praveen Kumar, CEO and Founder of Belfrics Group, in order to maintain the anonymity of their trades, traders may use self-hosted private wallets. “Taking measures to regulate the operation of crypto exchanges through market-centric tax policies would have been the right approach for both the industry and the regulating bodies,” he added.