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The Union Budget has imposed a fairly high taxation on profits derived from the sale of what it calls 'Virtual Digital Assets' but if the chatter has to be believed then the crypto people have reacted positively to this. The definition of Virtual Digital Assets is broad enough to sweep up all cryptocurrencies and NFTs and perhaps in-game assets as well. The structure of the tax is identical to that of gambling and lottery winnings. Not only is that appropriate, but it also reveals that the government has no delusions about what crypto trading is all about. Moreover, the tax is heavy and seems designed to ensure that it will be hard to make money out of trading crypto.
However, if one is to believe the news, then people who are involved with crypto trading in any way, are actually happy with the announcement. Why? Because they feel that this legitimises crypto in India and indicates that there will be no ban on cryptocurrencies. Apparently, on Budget Day, the number of registrations went up by 30 to 50 percent on various crypto trading platforms. The reason is said to be that there are a large number of people who want to dabble in crypto but given the threat of the government banning crypto outright, did not want to commit. They feared that they would buy crypto and then some new regulation would do something that would make their holdings worthless. That was a justifiable fear.
Now, since the government has imposed a tax, the logic goes that there cannot be a ban. However, if one goes by what the Finance Minister as well as some of her officers have said, this comfort cannot actually be derived from what the government has done. Rather, the position seems to be that the government is weighing various options and an outright ban is still not off the table. Concerns about financial stability and terror funding are very much there. However since there is crypto trading going on, they might as well collect a higher tax.
Do note that I'm saying a 'higher' tax. Even before April 1, when these changes come into effect, crypto profits are taxable. Exactly how, your tax lawyer will tell you but in general, no income is non-taxable just because it's from a new source that is not explicitly mentioned in the tax laws.
The question is, where does that leave what I would call the typical reader of this page - someone who wants to make well-thought-out investments based on fundamental value - and yet does not want to miss out on a big opportunity to make money. After all, Bitcoin as well as other cryptocurrencies have fallen to less than half their peaks. If one should invest on dips then surely this is a good time to invest?
To such investors, I would quote this recent tweet of Taleb's: For a contagion driven asset with no economic anchor such as #BTC, a falling price does not make it "cheaper" and more attractive. A falling price makes it less desirable &, paradoxically, more expensive. Why? Because price is its ONLY information. Please read this again, carefully weighing the meaning of each phrase. What he says may come as a surprise but when you think about it, it's blindingly obvious.
The stock price of a company has an underlying 'economic anchor', which is its business, the profits it makes and will make in the future. Therefore if the stock price falls and the anchor stays fixed (and thus the intrinsic value stays intact), the stock becomes cheaper and therefore more desirable to buy. Cryptocurrencies have no such 'economic anchor'. The only reason that is there to buy is the price and so if the price falls, then that reason gets weaker. There is no way to calculate value. It's a punt, pure and simple. On top of that, there are all the regulatory issues.
Still interested? Please understand these points and then take a call.
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