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Will crypto trading on decentralised exchanges help you avoid 30% tax?

Cryptocurrency Tax in India: While there is no legal way through which you can avoid paying 30% tax on income from cryptos and other virtual digital assets, several misleading claims on how to avoid crypto tax is doing the rounds on social media.

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Cryptocurrency Tax in India: While there is no legal way through which you can avoid paying 30% tax on income from cryptos and other virtual digital assets, several misleading claims on how to avoid crypto tax is doing the rounds on social media. One of such claims is that you can avoid tax on crypto income by trading on decentralised exchanges. 

Experts say that it doesn’t matter whether you trade on centralised or decentralised exchanges, every individual invested in crypto would have to clear his/her tax liability to avoid ending up on the wrong side of the law. 

In theory, one can argue that trading on decentralised exchanges can help in avoiding tax implications. But it may not be legally tenable. One can think of this as a loophole on which the Government may issue a clarification soon. 

Why income from DEX trading can be traced

As crypto is not yet a legalised and prevalent mode of transaction, you can realise actual gain from your investments and trades by converting the income into fiat currency. For that to happen, individuals need access to a banking channel, which can help the taxmen trace the source of money. 

“While in theory one may argue that tax implications can be avoided by transacting on decentralised exchanges because of their business model, however, it would not be legally tenable to undertake any action on such a view given that the intention of the government appears to be of taxing gains arising from the sale of cryptocurrencies, agnostic of it being transacted on centralized or decentralised exchange. This appears to be a loophole, which like any other tax law, may be clarified by government in the course of time,” Rishi Anand, Partner, DSK Legal.

ALSO READ | Can you avoid 30% crypto tax by buying tokens on a foreign exchange?

Decentralised Exchanges or DEX is a protocol by which crypto holders can trade/buy crypto  assets directly with the users, instead of using a centralised financial intermediary. DEX algorithm makes it completely automated. 

Experts say that since DEX is only a different mechanism for trading crypto, it should have no impact on the taxability. 

Hiding profits may lead to penalty

“The basic rule of thumb is that if you hold an asset in the form of crypto and you earn profit in its trading/ sale, you pay 30% tax on the profit without any deduction. Mode and manner of sale/ trading will not impact the incidence of taxation,”  Sameer Jain, Managing Partner, PSL Advocates & Solicitors, said. 

“However, because it’s a direct C2C transaction without any intermediary, the requirement of deducting and depositing 1% TDS on every transaction may not be applicable. Thus, the transactions may skip the Taxman’s attention, if the assessee does not self declare it but that income will still be liable to tax. Hiding profits earned through trading on DEX may lead to levy of penalty and interest,” he added. 

Newly inserted Section 115BBH in the Income Tax Act prescribes that income from transfer of any virtual digital asset (VDA) would be taxable at the rate of 30%.

“While one may be able to find a loophole in the existing tax regime using Decentralized Exchanges (DEX), Decentralized Autonomous Organization (DAO) or using exchanges not located within the reach, accessibility, jurisdiction of the Indian authorities, it is noteworthy that no such exception has been carved out in law with respect to the income of the concerned assessee, who unlike such DEXs or DAOs, would be subject to the Indian jurisdiction and would be most likely be within reach and accessibility for the Indian authorities,” Aditya Chopra, Managing Partner, Victoriam Legalis-Advocates and Solicitors, said. 

“Therefore, as per applicable law, if there is income from transfer of VDA, such income would be taxable at the applicable rate as per Section 115BH,” he added. 

Praveen Kumar, CEO & Founder of Belfrics Group, said that in order to maintain the anonymity of their trades, traders may resort to self-hosted private wallets, which may grant them anonymity. “Taking measures to regulate the operating crypto exchanges with market-centric tax policies would have been the right approach for both the industry and the regulating bodies,” he added. 

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