I will tell you about how you can pay 0% tax on cryptocurrencies in India. There is a lot of confusion, lot of problems that you know what government has charged like 30% crypto taxation.
People have gone bankrupt. Akshat has gone gone crazy because he keeps on talking about cryptocurrencies. No, I have not gone crazy. I will tell you on this article how you can pay 0% taxes and how I am is planning to pay 0% taxes on cryptocurrencies in India.
How To Save 30% Crypto Tax | What Is DAO ?
I will speak about a little bit of theory also so that it helps you understand that why governments can’t systematically charge very high taxation on crypto.
So little bit of theory there. And then I will give you an example and prove it to you that you don’t need to pay any taxes on cryptos.
3 Concepts You Need To Know about
So let us get the discussion started. And first and foremost, there are three critical concepts that you need to know about the cryptocurrency space. So the three critical concepts that you need to know is the
1.Difference between decentralization and centralization
2.What is decentralized autonomous organization
3.How the identity process and Web 3.0 works
These are all highly technical, complicated concepts, but I will try to explain it to you in very easy to understand and practical language. So first and foremost, let us quickly understand
The Difference Between Decentralization and Centralization
Centralization simply means the aggregation of power and aggregation of control and processes. For example, think about it this way that you might have an account at HDFC bank or SBI or ICICI bank. Who controls that bank account?
Truly speaking, you would say that here the bank account is in my name, I control everything.
The answer is no, you don’t necessarily technically own 100% of that account, because if tomorrow the bank decides to freeze your account, you can’t do anything with it.
Similarly, the government can come out with a mandate and say that Ban Person X Bank account. Then again, the bank account will get frozen.
So theoretically, yes, you are owning your bank account under your name. It’s linked to your bank card or card, all that stuff.
But there are central organizations that are controlling that bank account, the central organizations being the HDFC bank, SBI bank, the government, all these agencies control your bank account in true sense.
So you would say, how does that impact me? It impacts you a lot. So let me give you a couple of examples for better understanding.
One is a classic case of Lebanon’s economy. Back in 2019, this was even before the COVID period. So in Lebanon, what happened was that the entire economy was going through a massive crisis and government came out with a mandate and called it capital control.
So people who had money in their bank account, they could only withdraw a certain fraction of that money every single day as per the capital control rules.
And every single day, they used to see their currency depreciate. So, for example, if you had, let’s say, an equivalent of one lakh rupees sitting in your bank account in Lebanon, government would not allow you to withdraw more than 3-4000 every single day.
Every single day, the currency was getting depreciated. And as a result, people saw their one lakh rupee in real terms, becoming like Rs20,000.
So these are some of the crazy problems that you have when the world is centralized.
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On the opposite side of the spectrum, we have something called a decentralization.
So let me pick an example from the crypto domain to illustrate this point. So I’m taking you to a protocol called as Uniswap, and you can go on this particular website, Uniswap.org. And here is what they say.
What Uniswap exactly is so unisorp. Consider it to be a decentralized, app. Important word here is decentralized. So how does Uniswap define itself?
Uniswap is an open source protocol for providing liquidity and trading of ERC, 20 token on Ethereum. This is technical stuff. You don’t need to understand it.
This part is very important. So let me highlight some of the key words from this paragraph. So, number one, it eliminates the form of rent extraction.
The protocol is none upgradable designed to be censorship resistance. This word, censorship resistance, is extremely, extremely important. This is the prime reason why in the last five years, cryptocurrencies have gained so much prominence.
Is every cryptocurrency, every protocol completely decentralized?
The answer is no.
But compared to traditional banks, traditional systems that exist, many good cryptocurrencies and crypto projects are decentralized.
That’s a key aspect that you need to understand. And the most important word here is the censorship resistant part and the non upgradable part.
So basically, what happens in this decentralization game is that protocols like Uniswap are smart contracts. So what are smart contracts?
Smart contracts are pieces of code that are running on distributed ledgers like Ethereum and Bitcoin. So essentially, what happens is that these distributed ledger because of the distributed ledger technology.
So to say, these nodes are distributed. Right. Think about it this way, that if this is India, So imagine this to be India. And if Amazon has certain fulfillment centers within India, then Indian government can come and tell Amazon that, you know what? Shut down your operation. We don’t like you.
So they can Institute censorship, technically speaking. But Indian government or Portuguese government or UK government can’t do anything with distributed ledgers. Why?
Because these nodes are distributed all across the globe and no one controls these nodes. So to say, if I get into the explanation of distributed ledger, it becomes complicated.
But I hope you get the picture that these nodes are not sitting in India. Indian government does not have any control over these nodes, and therefore, they can’t censor them. So this is the first key point.
Second key point is that majority of these decentralized protocols are non upgradable. What does that mean?
It means that once the smart contract has been returned, you can’t do anything with it. The rules have been set. Just because the Indian government wants to impose a 30% taxation on anything that is happening on Uniswap, Indian government can’t come and say that, you know what Uniswap? Give us your trade book and do KYC for Indian customers and give us all data. You can’t do anything.
There is no agency here. It’s a smart piece of code that is running on distributed ledgers. So Indian government can’t dictate anything to decentralize protocols like Uniswap or Metamask.
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So an extended concept comes into play which is called a decentralized autonomous organizations(DAO).
what is the DAO?
DAO is basically a collection of smart contracts that you have a series of smart contracts that are running into the picture and these smart contracts join together and they create an organization called a DAO.
So UniSwap is essentially a Dow, right? So that’s an example of a doubt. Now you’ll say, okay, it sounds very fancy. What exactly is Dao and how is it different from current set of businesses?
So in the current world we have a lot of centralized organizations. So imagine yourself using Facebook. And if for some reason Facebook does not like your profile, or if your profile is offensive, then Facebook can ban you.
So who is controlling that organization? Mark Zuckerberg is controlling. Even if you go and own Meta or Facebook stocks, then also Facebook can ban you. And even as a shareholder you will have very limited say or literally no say in terms of day to day running of default.
This is true for TCS, this is true for Infosys, and this is true for Amazon, Microsoft, etc. Etc. So here I hope you get the picture. That who the rule makers are.
The rule makers are people sitting in the top management. Even if you own 1% of TCS, which is a big significant holding, you can’t dictate the CEO to make certain changes.
So centralized organizations again can Institute a series of censorship. The rules can be changed at the will of these rule makers.
But that is not the case when it comes to decentralized organization or DAOs. Now what is a DAO? Precisely.
DAO is a protocol like Unison and it works on a series of smart contracts. Now, again, the explanation will become really elaborate.
I don’t want to wait there, but here is the interesting bit about DAO. If any rules within this DAO or the smart contract that is running on the distributed ledgers has to be changed, it has to go through a voting process.
Now let me show you how the voting process works so you can scan through it again. You can go on Uniswap and read about it. So beginner’s guide to voting.
So what do you need in order to participate in the voting process? So you need to buy some shares of this company which is called as Unit Opens.
You need some Ethereum for transaction and a metamask installed.
Metamask again is a web three point. Overall it is decentralized in its nature. So if you go, if you take a look at some of the features that are being debated, whether they should be added to Uniswap or not, add uni support, send WBTC, Collatoral factor, et cetera.
So all these proposals are there and if 51% of people holding uni tokens vote yes then that protocol gets executed.
So similarly, if the government is proposing that they charge 30% tax on people interacting via unison, that proposal will be added here and 51% voting needs to happen on that protocol as yet for that to go through.
Will that happen?
I will talk about it subsequently on the article, but I hope that in decentralized autonomous organization you can’t include censorship. Just because government wants it does not mean that it will happen.
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They will have to get in the line like everyone else also and follow the rules that the computer is telling them. That’s the genius part of DAOs. Now comes the third and final concept that I want to talk about that will help you understand this taxation game at a fundamental level. Which is that how Web 3.0 identity is revealed. Now
What is Web 3.0?
It is the crypto world so to say, which is where the newer version of the internet is getting created. in short we currently are in Web 2.0 where centralized organizations exist and now we are moving towards the Web 3.0 space where decentralized organizations are getting created.
Now on Web 3.0 what happens is that if you go on Bitcoin here, what you will see is that if you go on this holders tab you will get all the data, the total number of nodes that have Bitcoin.
These are the total number of nodes that control bitcoins. Right now active addresses are these many. Now what you will see is that you will see addresses.
For example particular address called as 34 XP,4VRO something has total 1.2% supply of Bitcoin. So these are web 3.0 wallet addresses.
Here you can’t assert whether this is Satoshi’s address, whether this is Divyank’s address, but you know for sure that this address on the blockchain network holds 1.2% of Bitcoin supply.
So the point that I want to outline is that in Web 3.0 if I’m buying cryptocurrencies then you can’t figure out my identity unless I reveal it myself.
For example if I go on Twitter and say that hey this is my address, I will show you by transferring on Thursday at 1.23.
75 Bitcoin to this particular address, right then it becomes clear. So this wallet is associated with Divyank. But do I need to do it? The answer is no.
So Web 3.0 gives you that anonymity as well. You have control over your identity. Are there good parts to it? Definitely. Are there bad parts to it? Yes.
It requires more debate and there are systems and processes around it. Again, not getting into the security part of it because the article gets extremely complicated.
But I hope that you understand three critical concepts that in the crypto world, a lot of protocols are decentralized. There are DAOs. Decentralized autonomous organization and your identity can be marked.
Now, with that viewpoint, let us run through a simple exercise where we try to debate if a government, any government, not necessarily Indian government cannot control a doubt decentralized autonomous organization.
1. can the Indian government ban something like UNISWAP, which is a decentralized autonomous organization?
The answer is no.
Because the nodes of UNISWAP are not sitting in India. What can you do about it? These are decentralized distributed ledgers.
Indian government can’t do anything with it. That’s .1 now,
second point that you might say is that Divyank talked about the fact that if someone controls 51% of a DAOs network, for example, Unison, then they can control the network and change the voting process and all of other things.
Okay. So first and foremost, it requires massive amount of capital to do that. Uniswap, at one point in time was valued at $22 billion. So controlling 51% of the voting rights is really difficult. And if the Indian government buys even one single Uniswap token, then guess what?
A lot of people will call out the government that you yourself are buying cryptocurrencies. Then how can you not be in support of it? So there will be a lot of hallah created.
The government can’t even do that and control the network. So it becomes a problem for them. You will say that, okay, then the government will create its own network or a parallel system which will compete with something like Uniswap and will beat Uniswap.
Okay, so this is like this argument that there are a lot of taxis in India which are government run and they used to be you can go around and check it.
If you are living in cities like Kolkata or Mumbai, they have a big taxi association. Then why was it that companies like Uber and Ola came in, became billion dollar companies and took away market share from these government agencies?
The answer lies that the private organizations are smoother. We are creating better systems. They are creating and adding more value.
Yes, we can talk about the surge pricing in Ola, Uber, et cetera, et cetera. But generally speaking, we have improved the cab hailing infrastructure in a country like India and across the world.
And this is a trend that you will see in literally everything that private companies are better in marketing. They are better in creating developer ecosystem. They have a lot of leverage.
For example, a company like Uber burned $1 billion in order to make $2 billion.
Now can the Indian government do that? The answer is no, they can’t do that right?
The moment they won $1 billion a lot of taxpayers will start creating hallah around it that hey, why are you burning so much money with no guarantees of return?
So government cannot get into these type of businesses and make them stand out and make them compete with protocols like Unison.
So this brings us to the final flow of the story that if DAOs exist in the crypto space and government can’t control these DAOs or do anything about it, they will continue to exist.
How To Save 30% Crypto Tax
Let us take an example and run through it that will make things more clearer. So for example, let’s say that I have Rs1000 lying in my HDFC bank account.
So I picked that Rs1000. Then I buy some Bitcoin. Then you would say that, OK Divyank government will stop you from buying Bitcoin itself, right?
Government will come and put some taxes here. So you will have to pay taxes on Bitcoin. No, because there is something called a finance, right? And if I go on finance I can do something called as peer to peer.
Now peer to peer trading means that for example if you want to sell me your Bitcoin I will do a UPI transaction into your account. You will pay me Bitcoin in my decentralized wallet. Done.
You can’t do anything with that. And government would not even know why this transaction is happening in the first place. So because of this peer to peer transaction mechanism government cannot do anything in terms of stopping you from purchasing something like Bitcoin.
Let’s move on to the next part of the story. So now let’s say that this Bitcoin that you had purchased, it goes up in value. It becomes one RS200.
Now you’re sitting on a profit of 20%. Now if you’re in a doubt decentralized autonomous organization, for example Uniswap or Metamask, then the government can’t ask Uniswap or Metamask to do KYC of me, right?
They will not ask Uniswap or Metamask to share their trade books with the government and they would know that your Bitcoin has gone up in value and pay taxes to us. No, you can’t do it. Why? Because this DAOs as I showed you has to go through a voting process.
It can’t go through it unless you are controlling the network. So you are sitting on a profit of 20% here. Now you say, you know what, I need this money at some stage, right? Because I can’t live in the crypto world forever.
If I made 20% profit I want to withdraw it back. But if I withdraw it to my HDFC bank account government will know that hey, I have come out of the crypto world into this HDFC world and they will charge me taxes.
And I agree.
What you should do here is slightly convoluted, but you have a range of options.
1. You can convert this money into USDT. I have made a separate article on USDT. USDT is also a crypo currency which is equivalent to the USD means dollar. It is a very stable currency.
So if you’re converting this one Rs 200 into USDT, then you can do a fixed deposit on it and let it grow. And you can do that on something like World, which is very easy to execute and make 12.68% FD returns.
But you will still say that I’m still in the crypto world. I still can’t use this money per se because in India, majority of the organizations are not accepting USD. And I agree. Which brings us to option number two.
2. What you can do is that you can go open your finance account in something like Portugal. Now, I’m not necessarily talking from a retail investor point of view.
This is a step that you might not be able to execute right away. But I’m talking about a loophole in this entire process that you can go open a finance account in Portugal or have your friend open a finance account in Portugal.
In Portugal, as per this article, the crypto taxation is 0%. Now you can send these Rs 200 worth of BTC to your Binance Portugal account or to your friend in Portugal and they can in cash it for you in their banks in Portugal.
And then via emittance, you can bring that money back to India. Are you paying some commissions in terms of transferring money from Portugal to India? The answer is probably yes.
You would have to pay maybe 5% Commission as per the current rate, but you’re definitely not paying that 30% tax in this entire game. Now, two, three very quick questions because I’ll get a host of comments here. So first and foremost,
why are people not exploring this path as of now?
Right now the problem is that there is a lot of friction in the crypto world, especially around ERC 20 token chain. What it simply means is if you’re using the Ethereum blockchain to do all these transfers, then you have to pay a lot of gas fees. Why?
Because the networks right now are getting built. This is a new system. This is a new process. Like anything, there will be friction. When the stock market started this zero brokerage, it did not used to be there.
This zero brokerage has come up in the last one year and a half decades only. But the stock markets in India existed for a very long time. There was a lot of friction when the stock market got built.
Similarly, there is a lot of friction when the crypto market is getting built. It does not mean that these commissions will forever stay high. These commissions will come down.
And this entire chain that I explained to you will work out very easily the second key point that I will get here is that okay this looks like a very complicated process it requires a lot of technical understanding. yes !
you require to study this space if you’re taking positions in the crypto space you need to understand all the technical aspects around it as well.
How to do these transfers how to transfer these money outside India at a low cost you need to learn about all these aspects. If you’re not learning it becomes like a problem right because in decentralized autonomous organization space you are responsible for doing things on your own.
The bank is not going to spoon feed you so please learn how to read instructions how to understand these technical aspects third you would say that okay I don’t have a friend in Portugal I don’t have any relatives outside India all that stuff so Portugal is just an example it could be any other country the point of explaining this entire spectrum is that right now.
The systems are broken there is clear arbitrage opportunity here therefore a system of taxation cannot be built out that’s the larger point that I want to make this entire 30% taxation 50% taxation is a scare tactic it either shows that the government does not understand the technology or they are just doing it in a bad spirit just to shoot people away for a little while but as the system processes gets built as I release more and more tutorial more and more people will become aware of it.
and will start are taking stronger stance this was a slightly technical article but I hope you enjoyed our discussion on How To Save 30% Crypto Tax | What Is DAO ? please press the like button and I will see you tomorrow.