Terra Investors in India are Drowning! It’s a Double Trouble Situation for Them Now
Despite the emergence of Luna 2.0, Terra investors in India are in double trouble.
Terra investors around the world lost billions of dollars when its algorithmic stablecoin project, UST crashed, but they recovered a small part of their bets when a new token was distributed as compensation. Investors in India aren’t as fortunate. This is because the country’s tax system is punitive to crypto investing. TerraUSD and Terra token holders who got the new coin known as Luna 2.0 in a so-called airdrop face double trouble. They could be taxed as much as 30% of the value of tokens received and they won’t be able to offset any gains in the new token against losses from the previous one, tax experts said.
Under the new crypto tax regime, effective April 1, any income from the “transfer” of a “virtual digital asset” will be taxed at a flat rate of 30%. It does not explicitly mention how airdrops should be taxed, but Jay Sayta, a technology and gaming lawyer, and Manhar Garegrat, executive director of policy at crypto exchange CoinDCX, said in an interview that the distributions can be seen as income and are subject to the tax. According to them, the wordings in the law are so vague, including the definition of virtual digital asset and the definition of transfer, that it would be open to litigation or challenge by the tax department. There were over 160,000 investors that held Luna on the exchange on May 9 and by May 15 the number grew by 77% in India, according to Rajagopal Menon, Vice President at Binance-owned WazirX. It’s unclear how many more investors held TerraUSD. As per experts, the increase can be attributed to a surge in buyers post 9th May when the buyer-to-seller ratio was 5:1. In terms of the volumes, 11th and 12th May saw the highest volumes in Luna – 53 million USDT combined for both days. Anoush Bhasin, the founder of crypto-asset tax advisory firm Quagmire Consulting, said in a report that the Luna 2.0 airdrops may fit into the existing definition of gifts so a flat 30% tax may not apply but gifts are taxed based on a taxpayer’s income range, or slab rate.
Whether considered as a gift or income from crypto, experts said that under the new tax regime there will be two stages of taxation. First, at the time of receiving the airdrop, a gift tax or a flat 30% tax, will be levied based on the valuation of tokens at the time of credit. Second, if the tokens are sold, a flat 30% tax will be applied on the incremental income earned regardless of how the tokens are categorized, and if the tokens rose in value. “There could be a scenario where people have received tokens above INR 50,000 and if it treated as a gift, you’ll have to pay taxes on it, but by the time they sell it if the price falls then you’ll actually realize lesser money, and you may actually go more out of pocket in paying taxes than what you recover and that is the worst-case scenario for them as Luna 2.0 was actually issued to compensate,” reported Meyyappan Nagappan, Leader of Digital Tax at Nishith Desai Associates. Luna 2.0 started trading on May 28 and as of June 3 at 2 p.m., US East Coast time, it was trading at US$6.59, down 9% in the last 24 hours, according to CoinGecko and Huobi Global.
The quandary is reflective of an Indian government that has long had an uneasy relationship with crypto. The tax structure unveiled this year treats digital assets unfavorably compared with stocks and bonds, leading to warnings of a crypto exodus. Trading has withered as a government-backed payment network was made unavailable to cryptocurrency exchanges, leaving clients unable to fund their accounts with rupees.