A few months back, when the Indian government announced cryptocurrency taxation in India, there was some cheer from the crypto community as it indirectly meant that the authorities were okay with cryptocurrencies.
Though 30% tax on capital gains left a sour taste in the mouth, it was still better than having no clarity about the legality of these digital assets.
But more importantly, another announcement is what is causing problems for crypto traders. And that is the 1% TDS that comes into effect from 1st July 2022. The rule says that a 1% tax is to be deducted (TDS) on all cryptocurrency transactions irrespective of whether buying or selling and whether at a profit or a loss.
This is what is troubling the crypto community in India as currently, no other country imposes such a transaction-based tax on cryptocurrencies.
And the reason for this is that many experts feel that this TDS will choke up the capital if one trades a lot. And over an extended period, this might even suck the liquidity out of the markets. What this means is that after a while, if one places a buy order, it might not get executed smoothly as it was getting earlier as sellers wouldn’t be eager to sell so soon in view of 1% transactional deduction of tax.
While 30% capital gains tax is not as big a problem as what 1% TDS is posing to be and the negative impact it will have on the structure and volumes in the Indian cryptocurrency markets.
From some estimates, it is said that those who trade a lot, will face bigger issues. After just about 100 trades, a trader might see 50-60% of his capital locked up due to 1% TDS! So high-frequency traders who made hundreds and thousands of transactions every day cannot live with such a rule.
It is for this reason that trading strategies like Day trading, Range trading, Scalping, and High-Frequency Trading (HFT) may not remain suitable or profitable. As a result, it’s best to look at cryptocurrencies as long term investments. Buying and holding (or HODLing) for long. The eventual tax on capital gains still remains. But at least one doesn’t deplete the capital by 1% after each transaction. Not the best option but still more sustainable than getting the capital locked up due to a string of TDS deductions if one trades heavily.
Someone had recently asked me for some tips for Bitcoin trading. I told them frankly that this is not my field of expertise. But given the new 1% TDS rule, things might change a bit for trading volumes soon. Also, I think instead of asking Which is the best way to make money – Day Trading vs HODLing Bitcoin, it is rather Which is the best way to ‘keep’ money and grow it. And the better answer is HODLing (given that the 1% TDS rule eats away capital if someone day trades in cryptos regularly).
And if you plan to hold cryptocurrencies for the long term, then give some thought to building a proper cryptocurrency portfolio. Also, do not go beyond 1-5% of overall networth invested in cryptocurrencies as these are wildly volatile and can crash heavily regularly.
Within your crypto bucket, you have to decide how much to allocate to Bitcoin and other Altcoins. Though having 100% of your crypto basket in Bitcoin is also okay, it’s still better to diversify a bit into Bitcoin, Ether and a few other Altcoins. Something like 30-40% in Bitcoin, 30-40% in Ether and the rest 20-30% in Altcoins.
For the time being, it does seem that due to 1% TDS on crypto transactions in India, the volumes on cryptocurrency exchanges will dip even further. How this auger for the Bitcoin investors in the long term is to be seen cautiously.
Disclaimer: Cryptocurrencies and other digital assets are unregulated extremely volatile and highly risky. There is no regulatory recourse for any loss from such transactions. Please don’t consider any of the above discussions as investment advice.