Crypto trading volume drops in India as additional taxes hit investors

India’s government on July 1 implemented a 1% tax deducted at the source (TDS) on every cryptocurrency trade over 10,000 Indian rupees, or about $127. The law has only been in place a few days, but there’s already been a chilling effect on Indian digital asset marketplaces.

The levy is an addition to the 30% tax on all crypto-based incomes that began on April 1, which is double India’s 15% capital gains tax on short-term gains for traditional equities and shares.

The increasing taxation could serve as a further roadblock for citizens looking to trade crypto as the potential for financial gains dwindles.

Trading volume on WazirX, one of the largest cryptocurrency exchanges in India, fell 79% from $14.23 million on June 29 to $3.04 million on July 1, when the tax was instated, according to data from crypto aggregator nomics. Since then, trading volumes on the Mumbai-based exchange slightly increased to $4.63 million on July 4 but are still down 67% from the end of June.

While the decline in trading volumes can’t be entirely blamed on India’s crypto tax laws, the recent pullback is likely attributable to the new taxation. Other factors — like crypto market volatility, liquidations across the industry and general bearish sentiment — have contributed to the overall decline globally, too.

“The tax news in India effectively places a 31% tax on each crypto transaction,” David Gan, founder and general partner at OP Crypto, said to TechCrunch. “Especially during current macro conditions, investors are down on their initial investment, causing them to sell to realize their losses and write off their capital gains tax.

“Overall, we think that larger crypto companies based out of India will move overseas due to the extreme nature of these new regulations,” Gan said, though he noted his firm was still bullish on talent there and will continue to back teams building the future of web3 in India.

“Regulations are good for the crypto industry and a definite positive step,” Sumit Gupta, co-founder and CEO of crypto exchange CoinDCX, said in a tweet. “However, 30% taxation and 1% TDS is unfair. Would humbly urge the government to reconsider the % of TDS and tax.”

The taxes are proving to be a “major hindrance to the growth of this industry” Gupta added. “The objective of tracking transactions and transparency can very easily be achieved in other ways too.”

TDS is recoverable depending on thresholds, Gan said. “The TDS deters trading activity, which until recently was reflected in trading volumes.”

Imposing a 1% TDS on every trade will also cause the government to lose out on tax revenue, Gupta tweeted, adding that “with 1% TDS, trading frequency is likely to drop in just 7 months! And volumes are expected to go down in 10 months. Whereas with 0.01%, we see consistent growth in trading volumes and frequency even after 18 months!”

While India is ramping up taxation, other countries are pushing for further crypto regulation to prevent greater disruption in an already shaky market. Earlier today, the Bank of England’s Financial Policy Committee warned that recent cryptocurrency volatility emphasized the need for greater financial regulations.

The total crypto market capitalization has fallen roughly 70% from a peak of nearly $3 trillion to about $888 billion as of July 5, according to CoinMarketCap data.

“A number of vulnerabilities were exposed within cryptoasset markets similar to those exposed by past episodes of instability in more traditional parts of the financial system,” the Bank of England report stated. “These include liquidity mismatches leading to run dynamics and fire sales, and leveraged positions being unwound and amplifying price falls.”

The report added that while these events didn’t pose risks to general financial stability, it emphasized the need for “enhanced regulatory and law enforcement frameworks to address developments in these markets and activities.”

Government officials globally are continuing to implement or discuss new policies and rules for crypto as the industry grows. Whether there will be lasting effects from these decisions is yet to be determined, but regulations and greater taxation are likely here to stay.