The incidence of India’s crypto tax

The crypto tax is the first item listed in a section of the budget memo headed “Revenue Mobilization”. The document [PDF] explains that India wants to tax income from crypto-assets at a 30 per cent flat rate.

By comparison, India currently taxes short-term capital gains made by selling shares at 15 per cent. The budget memo also calls for a one per cent tax on sales of cryptographic assets, payable by parties to the transaction, to widen India’s tax base.

Here is the first article link.  As I understand it, the 30% is on net income from crypto, and there is no tax deductions for losses (see this explainer).  (Does the tax define gains “year by year,” or “for each bitcoin sold”?)

I am wondering what is the incidence of this tax.  Presumably India is a price-taker in the crypto market as a whole, so this initiative should not much affect the global price of crypto, unless you take the policy as a signal about other, future crypto taxes to come around the world.

Under one (unlikely) scenario, all Indians were marginal crypto buyers, and so with a 30% tax they just stop holding crypto.  The Coase theorem suggests that others are always willing to bid more, because in many other countries the crypto taxes are lower.

More realistically, many Indians are infra-marginal buyers, with sufficiently high expectations of price appreciation that some of them will stay in the market.  The “saner” marginal buyers will drop out, and sell their crypto to non-Indians, and the most optimistic Indian buyers will stay in.  Looking forward, crypto in India will be shaped by the giddiest and most bullish asset holders, compared to the status quo.  More crypto will be held by fewer, more enthusiastic hands.

The Indian government is also signaling that it will not ban crypto outright.  That ought to increase the demand of the “giddy” buyers all the more.  If you are going to stay in with the higher tax burden, at least you know that bitcoin and other markets will continue in India.

How does the tax affect the value of the rupee?  In the short run, some Indian taxpayers may sell their crypto for rupees, raising the value of the rupee, but probably very slightly.  Longer term, the rupee may be worth less because it is a less effective vehicle for investing in crypto, again with the effect here likely being small.

Otherwise, the demand for non-crypto risky assets in India will increase.  If those assets can be used for loss offsets, they will be relatively more valuable because crypto cannot be so used.

Insofar as India has a local, “India-only” crypto market, new issues there will have to be lower in price to attract buying interest.  That will serve as a tax on those Indians who supply inputs into crypto production.

Indians who have made a great deal from crypto may attempt to give up their Indian citizenship and Indian taxpaying liabilities (how easy is that?).

What else?


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