This April Fools’ Day 2022, Read 5-Point Guide On How not to be a crypto fool – Know How You Can Avoid Being a Fool in Cryptocurrency Investing.
New crypto tax rules from today. Flat 30% tax on crypto income and 1% TDS from July 1. Illustration By Shyam Kumar Prasad/FinancialExpress
Crypto investors in India are set to enter a new phase of uncertainties now. While the rule mandating a flat 30% tax on crypto income comes into force with the start of the new financial year today, tax certainty is not a guarantee for legal status of virtual digital assets (VDAs) in India as the government is still mulling the issue.
The proposed 1% TDS on crypto transfers from July 1, 2022 and talks of imposition of GST on the entire value of crypto transactions are expected to further increase the woes of crypto investors.
Amid uncertainties, keep the following points in mind to avoid unnecessary losses when investing in cryptos:
Invest in what you can understand
Investing in something you don’t understand could be disastrous. If you think you must invest in a crypto asset, first try to understand everything about it. If it is fundamentally sound with huge potential of growth in future, you may buy some of it.
“To understand a crypto project, one needs to have an understanding of technology and how it works, and if not, then one should get a reliable advisor for checking project viability,” says Dileep Seinberg, founder and CEO of blockchain development company Thinkchain.
Don’t invest too much money
Assuming you have understood the fundamentals of a crypto token, don’t invest too much. Crypto is still an evolving asset class, facing regulatory hurdles. Hence, it is not fit for high-value investments. “Crypto tax of 30% and 1% TDS on transfer of VDAs have taken the shine away from crypto markets. Retail interest has also faded owing to the uncertainty about future regulations. It is not the right time for high-value investments,” says Yash Upadhyay, strategy lead at IIFL Group.
Moreover, the crypto market is extremely volatile and investments risky. Hence, financial planners suggest that one should have a very small part of the portfolio in crypto at present.
“From an asset allocation point of view, I would classify cryptos to be riskier than even small-cap stocks. I wouldn’t recommend anyone to put more than 5% of their long-term investments in crypto at the moment,” says Anmol Gupta, founder of 7Prosper Financial Planners.
Invest for the long term
Experts say that 1% TDS on transfers would eventually kill crypto trading in India. So quick gains with short trades may not be possible. However, if you are certain about the future prospects of a crypto asset, you may buy some of it for long-term gains.
“The only sensible way to hold crypto at the moment is investing in fundamentally good tokens. Only invest in tokens which you really understand and see a potential in the use case of those tokens in the long run. Invest only if you are fine with seeing returns over a period of 5-10 years,” says Gupta.
Check where you are holding your crypto
Tech bites tech. You would be extremely disappointed if you don’t know how to hold your cryptos safely. Now that trading may not be profitable, the safest place to hold your crypto would be hardware wallets if investing for the long term.
“Self-hosted, non-custodial wallets are the safest bet. It’s advisable to own the keys to your digital assets and keep the backup. Not your keys, not your coins is the widespread sentiment across the crypto-verse,” says Sharat Chandra, VP, Research and Strategy at blockchain-based identity management platform EarthID.
Don’t try to dodge tax
Lastly, as new tax rules become effective today, it would be wise not to do anything that would draw the taxmen’s ire.
“Crypto investors should not look for ways to dodge taxes on virtual digital assets and stay away from anyone suggesting a workaround to avoid taxes. Staying compliant is necessary,” says Chandra.
Chandra also suggests not to give in to the lure of free airdrops. “Airdrops from non-descript projects have often led to phishing and wallet thefts. Due diligence is necessary to avoid falling prey to scams,” he says.