Cryptocurrency Tax: The recent proposal of the Government to impose flat 30% tax on income from crypto and other virtual digital assets has dampened moods of investors. Such a high tax on earnings effectively means small crypto investors with little money and smaller investment periods may not be able to make much meaningful income from crypto. And even in the long run, nothing would be certain.

Like mutual funds, large gains have been realised by long-term crypto investors till now. However, given the uncertainties of crypto markets, the possibility of large gains depend on various unknown factors beyond the knowledge and control of investors. Hence experts now say that investing in stocks and mutual funds may prove to be more beneficial for small investors – both from taxation and income perspectives.

“Crypto is a highly speculative asset class right now where the information asymmetry between those who are dedicated practitioners and those who are novices is large. Casual investors are probably best kept away from cryptos, unless it is a part of a diversified portfolio where it balances the portfolio risk,” Utkarsh Sinha, MD, Bexley advisors, told FE Online.

“For the average investor: in the long term, mutual funds remain the best investment. It is always good to have a very small portion of your portfolio for speculative and high-potential bets, but one should never put all eggs into one basket. Especially when it is as heated a market as crypto, where it is difficult for casual investors to distinguish long-term high-quality products from fly-by-nigh operators,” he added.

Mutual fund and Stocks vs Crypto tax

From taxation perspective, mutual funds and stocks are more attractive.

Short-term capital gains on the sale of equity shares/equity-oriented mutual funds are taxed at a flat rate of 15%. However, long-term capital gains on the sale of equity shares/equity-oriented mutual funds are taxed at 10% above Rs 1 lakh gain. No tax on gain up to Rs. 1 lakh.

Other long-term capital gains are taxable at the rate of 20% with indexation benefits and short-term capital gain is taxable as per the applicable slab rate.

Further, in Budget 2022, taxation of crypto is introduced in which it is proposed to tax income from crypto at a flat 30% without allowing deduction of expenses except for the cost of acquisition. Also, loss from crypto is not allowed to set off from any other income and it cannot be carried forward as well.

“Talking with reference to the taxation perspective, it may be beneficial for small investors to shift their funds from crypto to mutual funds or stocks to save the tax considering the tax rate on crypto is high as compared to stocks and mutual funds. Also, deduction of expenses is not allowed in the case of crypto whereas the same is allowed for stocks and mutual funds,” Abhishek Soni, Co-Founder Tax2win said.

“However, the overall decision needs to be taken considering the other factors as well such as risk appetite, ROI and allocation of portfolio etc,” he added.

Source: https://www.financialexpress.com/money/income-tax/30-percent-cryptocurrency-income-tax-should-small-investors-move-to-mutual-funds-and-stocks/2441057/