Tax regulations

The Profile of Crypto Investors Changes as Tax Regulations Go Into Effect

Mumbai: Younger investors who drove the country’s cryptocurrency boom appear to be liquidating their positions under new tax rules, to be replaced by high net worth individuals (HNIs) as a key investor segment on crypto exchanges.

Exchanges said several young investors who were making money from high trading volumes, including many from smaller towns and cities, liquidated their positions, especially in riskier assets.

At the same time, HNIs that tend to invest high amounts, sometimes touching anywhere around Rs 10 lakh at one time, are showing a growing appetite for crypto assets, they claimed.

Now, the changing profile of the investor also has an impact on the nature of the investment, said industry experts.

The way HNIs trade and invest is different, as are the assets they invest in.

HNIs do not trade as much as their younger counterparts. Also, they tend to opt for relatively safer crypto assets such as Bitcoin and Ethereum, or even stablecoins pegged to the US dollar or other currencies.

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“HNI investors now have more clarity than younger people,” said Sathvik Viswanath, co-founder and CEO of Unocoin, a cryptocurrency exchange.

A 30% income tax on returns from all virtual digital assets (VDAs), introduced in the recent budget, went into effect on Friday. The government also announced a 1% TDS on these assets from July 1.

Crypto exchange officials have also said that the government’s move to ban offsetting losses from one crypto asset transaction against gains from another would wipe out profits for retail investors.

Suppose a person invests in, say, both Bitcoin Ethereum and makes a loss of Rs 1 lakh on one and a profit of the same amount on the other, the investor will still have to pay Rs 30,000 tax , because offsetting is not allowed, they pointed out.

From the young to the rich

Young people from Tier 2 and Tier 3 cities had flocked to cryptocurrency platforms during the Covid-19 pandemic and crypto exchanges had also seen stronger growth in smaller towns than metros.

Crypto exchange WazirX previously told ET that most of its users are under the age of 35 and that the exchange saw 2,648% growth in user registrations in 2021 in Tier II cities and level III of the country.

Other exchanges had also recorded similar trends, with most new cryptocurrency investors coming from cities such as Lucknow, Ahmedabad, Patna, Bhopal, Vadodara and Kolkata. According to data available with BuyUcoin, a cryptocurrency exchange, Bhopal saw the biggest jump in new investors last year.

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But now that the tax system is in place, many of these young people are falling behind.

“Some small retail investors would withdraw from the crypto industry itself just because they would have the burden of filing their returns by the end of the current fiscal year,” Unocoin’s Viswanath said.

With big investors not so actively trading slowly replacing younger ones, crypto exchanges should see lower volumes, experts said.

“We have seen trading volumes experience slight declines over the past few weeks, but this can mainly be attributed to slowing retail markets,” said Shivam Thakral, CEO of BuyUcoin.

He also said that many investors hedge their crypto portfolios in stablecoins that are tied to reserve assets like a country’s currency or a commodity.