Should You Sell Your Crypto Holdings Because of Tax Concerns? Depends On Your Holding Period

While presenting Budget 2022, Finance Minister Nirmala Sitharaman announced 30 percent taxation on "virtual digital assets" such as cryptocurrencies. "No deduction in respect of any expenditure or allowance shall be allowed while computing such income, except for the cost of acquisition," Sitharaman said. The new rule will come into effect on April 1. So, should you sell your crypto holdings or keep them? 

Crypto Hold vs. Crypto Sell

Some in the crypto industry as well as financial experts have advised investors to sell their crypto holdings, given the tax regime announced for virtual digital assets. Investors who have made positive returns should definitely consider this, especially if they are not in the highest tax bracket of 30 percent. Investors in the red will also benefit from selling by booking losses prior to April 1, 2022, and have the benefit of an offset of such losses against other capital gains or a carry-forward of the loss for setoff in future years, "says Harish Prasad, Head of Banking, India, FIS. 

Re-purchasing on or after April 1 is an option, says Prasad, if the investor wishes to continue investing in cryptocurrencies. This strategy will, however, also depend on the transaction costs involved. 

Another recommendation is to square off all open positions to avoid the hassles of KYC, eligibility to claim losses on existing positions, and questioning from tax officials in connection with the reopening of earlier assessments to establish the trail for investments in cryptocurrencies.

Investors with a long-term vision of crypto holdings may hold on to their investments. If an investor has invested a large amount, he or she may hold on as they would have averaged out their cost at the present rates. For HNIs (high net-worth individuals), global jurisdictions offer the flexibility of exciting crypto trades and the ease of conversion of cryptocurrency into a fiat currency, says Yashesh Ashar, Partner, Bhuta Shah & Co. Therefore, they may not consider selling before March 31. "However, crypto investors should be aware of the tax regime that will take effect on April 1, 2022, as well as open issues under GST laws and FEMA (Foreign Exchange Management Act)," Ashar adds.

If some investors were hoping that the taxes would be reduced after March 31, they may be disappointed. Shantanu Sharma, vice-president, growth and marketing, EasyFi Network, says the government is unwilling to change these rules.

Another reason to sell would be the rule that says losses from crypto assets or capex for crypto mining cannot be set off against gains from other crypto coins. 

If cryptocurrencies do not suit your investment profile due to factors such as volatility, you could consider this an opportunity to exit the asset class.

The Crypto Market After April 1 

Some crypto industry experts are positive about the market after April 1. Moreover, the Indian crypto market’s size is not significant enough to create much of a dent in the global crypto bourses. "There will not be much difference in the Indian exchanges as well; it will be business as usual," says Sharma. 

The new taxation rules coming into effect may not matter much as the movement in the crypto market is not dependent only on the tax laws of a country but on a variety of social, economic, and political factors in addition to demand and supply. 

At present, it is estimated that India has the second-highest number of cryptocurrency users. Ashar says, "Crypto as an asset class has caught the imagination of a significant number of Indians, and the demand from Indian investors is not expected to slow down."

However, taxation may cause waves in the initial days as short-term traders move out of this business and re-enter after there is more clarification or relaxation in the rules. Long-term or early investors are expected to continue as usual. There may be some downward price action in some major coins and tokens as people adjust to the new rules. 

"I predict that the crypto business will experience favourable growth as uncertainty has decreased and the investment environment has improved." Following a slight correction for a liquidation event, we will have a bull run, "says Gaurav Mehta, founder of Catax, a crypto tax software firm.