Why crypto tax is the first step to regulation of virtual currency

It was not so long ago when Budget 2022’s treatment of cryptocurrencies effectively left the industry in a deep cleft. Anticipating major consequences from the tax decision on virtual assets, more than half of the interested investors believed that levying such high taxes will as good as drive crypto-businesses into the arms of other crypto-friendly nations such as Dubai, Singapore, even Thailand. Many even feared that the hefty tax on the sector could cause it to operate covertly and relocate any future, creative, layer 2 products to other countries.

I would be wrong to say that such fears have been quelled since February 1, when Nirmala Sitharaman, India’s Finance Minister, first proposed a flat tax rate of 30 percent on income from virtual assets without any exclusions or deductions. The debate is still raging. With investors divided, there is still a great confusion in the market regarding whether one should or shouldn’t participate in the new-age asset class, especially considering the excessive volatility of crypto tokens.

I believe that, even with the increased tax rate, the crypto market will expand.

Crypto tax is the first step to crypto regulation

When involvement from individuals who had been sitting on the sidelines because of the 2018 delegitimization eventually comes to the forefront, the clarity in the taxing process will prove to be a significant first regulatory step towards wider adoption.

Even though the taxes are high, there is greater transparency in cryptocurrency dealings now than there were earlier. This transparency will undoubtedly aid investors in their quantitative decision-making process, giving a much-needed structure and stability to their crypto portfolios. That is to say, any positive action from the government at this time must be taken on the chin.

Moreover, investors can still profit from holding crypto in the wake of budget statements. As the budget declaration has lifted virtual assets to a new level of importance in the eyes of investors, more investors are looking to it for diversification. For retail investors, it is an excellent opportunity to begin their Bitcoin journey. It turns out, then, that the bigger question is not whether to invest or not but how to invest.

Not if, but how to invest

A crypto investment strategy is what should take priority in the minds of investors now.

Apart from the fact that investing is a deeply personal choice, and each investor has a unique investment philosophy, time horizon, and risk tolerance, it appears that investors don’t require a substantial portfolio readjustment in the aftermath of the tax implementation. Existing investors, for now, can keep on with their previous approach while it is the safest for new investors to invest in ‘blue-chip’ crypto coins, especially in the face of the recent Terra’s LUNA crash.

As long as investors’ focus lies on stable themes and sturdy sectors, their long-term strategy need not be modified at all. That is, of course, not good news for day traders who aim to profit from very short-term price movements but an SIP-modeled or measured investing strategy is the best bet for investors at this point. When it comes to protecting investors against the treacherous market volatility, a small amount invested over time is what serves best.

So, yes, crypto can be tricky and the taxes are high, but higher returns are yet possible – just as long as investors look long term, do their research, and focus on future trends more than the could haves and should haves.

(Andesh Bhatti is an Angel investor, and Founder of Collectcent-Supply Side Advertising Platform. Views are personal.)

Published on: Sunday, May 22, 2022, 09:51 PM IST