Taxation Puts Cryptos At A Further Disadvantage Against Equities

With the government introducing a steep tax rate of 30 per cent on cryptocurrencies, will equities that are more tax-efficient become more attractive for Gen-Z and millennial generations? The government seems to have put its weight behind equities in the tug of war—being played out in the minds of investors, especially the Gen-Z and the younger millennial generations—between the two riskiest assets, equities and cryptos.

Cryptos, Equities Vie For Young Investors

Both the stock and crypto markets in India saw a surge in the number of subscribers in 2021. The number of equity market subscribers were up from 42 million in 2020 to 80.6 million as of December 31, 2021.

In crypto adoption globally, India ranks second, according to Chainalysis Report 2021. By some estimates, there are about 10-15 million crypto investors in India. Most of these investors are from the younger generations. According to the 2021 user data collected by Paxful, one of the world’s leading peer-to-peer crypto marketplaces, 32.21 per cent of crypto traders are reportedly 18-24 years old, while another 32.76 per cent are in the 25-34 age group.

For all crypto investors in India, especially young investors, the new tax rules may be a deal-breaker.

New Crypto Taxes

The Union Budget 2022 introduced a steep tax rate of 30 per cent on virtual digital assets, including cryptocurrencies and non-fungible tokens (NFTs), while giving a slight relief on long-term capital gains (LTCG) tax levied on unlisted equities; for listed securities, the LTCG tax rate is 10 per cent, subject to conditions. (Read more about it here)

Main Tax Hurdles For Cryptos

1. Virtual digital assets to be taxed at 30 per cent

2. Only the cost of acquisition can be reduced while computing the gain

3. No set-off of any loss is permitted against crypto gains

While the gap in the tax rates is significant, the scales are already tipped in favour of equities when compared with cryptocurrencies. Taxation just adds another hurdle for cryptocurrencies.

Why It’s Advantage Equities?

Lower risk: The quantum of risk in equities and cryptocurrencies is not comparable—but investors who are lured by quick gains and the buzz around cryptocurrencies don’t necessarily keep that in mind. Cryptocurrencies remain unregulated and are riskier than equities, which are traded in a regulated environment. Moreover, the costs for investing in cryptocurrencies are often ignored. In comparison, cost of investing in equities is minimal.

Lower volatility: Historical data suggest that crypto is more volatile than equity. Between January 1 and December 31, 2021, Bitcoin, the world’s oldest cryptocurrency, touched a high and low of $68,789 and $28,130, respectively—technically, a fluctuation of over 200 per cent. In contrast, the broader stock market index Nifty moved in the range of 14,018 on the lower side to 17,345 on the higher side over the same period—24 per cent fluctuation. (Read more volatility in cryptos here)

Lower tax: The Budget has offered tax relief to investors in capital assets (other than listed shares and equity mutual funds or MFs) by capping the surcharge levied on LTCG at 15 per cent. According to an EY report, the highest LTCG tax rate will reduce from 28.5 per cent to 23.92 per cent. Listed shares and equity MFs attract LTCG tax at 10 per cent and 4 per cent cess, respectively, provided the gain in a financial year is above Rs 1 lakh and the equities are held for more than a year. In other words, gains below Rs 1 lakh are tax-free if the holding period is more than a year. To read more about how much you pay as tax on equity and other assets, read Outlook Money’s latest Budget coverage here.

Are The New Taxes A Death Knell For Cryptos?

The new taxes may prove to be a hindrance for cryptocurrencies, but it is also good news in the sense that the taxes are also a step towards firm regulations.

“The tax provisions for virtual digital assets in India is just a temporary first step, which will lead to rationalisation eventually... At the same time, several people who were holding back from investing owing to (lack of) regulatory clarity, might feel that they have a green signal. On the whole, I think this will lead to increased volumes,” says Ajeet Khurana, a crypto advisor and investor.