Solving the complexities of computation in crypto taxation

from India crypto The investor base witnessed explosive growth in the last 2 years, with recent estimates suggesting over 20 million cryptocurrency investors in India. India’s decision in February 2022 to explicitly identify cryptocurrencies and other virtual digital assets (VDAs) for taxation caused an initial panic in the industry. India was going to start taxing profits on VDA investment activities at a fixed rate of 30 percent from April 1, 2022. In addition, the government announced the imposition of tax deducted at source (TDS) from July 1, 2022; whose responsibility largely fell on the crypto exchanges operating in the country.

While there have been some aggressive comments from policymakers (including the RBI) about cryptocurrency trading and its exposure at the individual investor level, we believe such attention was largely directed towards creating proper checks and balances for cryptocurrency trading. investor protection and systemic risk management throughout the cryptocurrency ecosystem. . Such political concern is welcome if it leads to stability and greater transparency and accountability for the industry to prosper in the long term.

The government has yet to explicitly grant legal status to VDAs, while the reality of taxation is far beyond us. Even before the policy action in February 2022, prudent crypto investors were filing tax returns based on their interpretation of what is considered income or capital gains for the fiscal year ending March 31, 2022 and 2021. In many cases, such tax liability calculations were grossly overstated or understated.

Unlike conventional equity financial markets, crypto investors trade on 8-10 major crypto exchanges that are registered in India, as well as 3-4 major international exchanges. For those investors who trust these Indian registered exchanges (including some international exchanges), they are your gatekeepers to access crypto assets.

The intricacies of calculating taxes in the world of cryptocurrencies are truly appreciated when looking at the various investor use cases that need to be considered in order to arrive at an accurate assessment of the tax liabilities of each cryptocurrency investor. This is one way that smart technology solutions to help 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 the transaction history data on each of these crypto trading accounts to provide peace of mind when it comes to calculating taxes.

Investors increasingly want to track their tax liabilities 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 maintain multiple crypto accounts. Our estimates suggest that, on average, each crypto investor in India maintains 2-3 crypto trading accounts.

Cryptocurrency exchanges will benefit in the way that cryptocurrency investors appreciate transparency and feel comfortable returning to trade more frequently. It is worth noting that political action in February 2022 led to an 80% decline in trading activities on cryptocurrency exchanges as tax uncertainty spooked the investment community.

The crypto investor is not a tax specialist and needs specialized advice or solution. Given its high frequency of trading (understandable in times of high price volatility) and the complexities around earnings calculations that involve (a) tracking each trade by type, date, time and size; (b) apply first-in, first-out (FIFO) logic for gain calculation; (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 computation of taxes in the case of purchases in international exchange houses in US dollars; (e) the proper tax treatment of bets, accrued interest; forking, airdrops, etc.

By providing transparency and certainty in the calculation of taxes, the crypto taxes The platforms provide great peace of mind to crypto investors, which in turn helps them pursue their investment goals with singular focus. From a crypto exchange perspective, solving tax calculation challenges leads to a more stable client environment, where the focus is back on investment; It enables exchanges to innovate product offerings and cater to the diversity of demand from their customer base.

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