Jai Sahu
The approval by the US SEC of 11 spot bitcoin ETFs, including those offered by BlackRock, Vanguard, Franklin Templeton, Valkyre, Fidelity, and Invesco, on January 10, has significant implications.
According to industry experts, the SEC’s approval of spot bitcoin exchange-traded funds (ETFs) in the United States has opened up a new avenue for Indian investors to enter the world of crypto assets. This move not only offers them investment opportunities but also comes with taxation benefits.
The approval of these ETFs, particularly by well-established financial institutions, is expected to introduce more stability to the price of bitcoin. Over time, it is anticipated that liquidity risks will decrease, attracting institutional investments. “Institutional investments will now flow in. We anticipate around $5 billion coming in the next 45 days itself,” said Sidharth Sogani, Founder and Chief Executive Officer of CREBACO, a crypto research firm.
This development carries significant importance for both Indian crypto investors and policymakers, as it provides them with a structured and regulated means to engage with the cryptocurrency market.
Indian investors can acquire US ETFs directly through domestic or international brokers, similar to their investment in US stocks. Additionally, numerous modern stockbrokers offer convenient access to US stocks and ETFs.
It’s worth noting that overseas investments in stocks and ETFs are subject to the guidelines of the Reserve Bank of India’s Liberalized Remittance Scheme (LRS), allowing Indian investors to allocate up to $250,000, which also extends to US ETFs.
However, remittances for trading in the US stock market or any foreign market are prohibited according to LRS guidelines.
Viram Shah, Co-Founder and Chief Executive Officer of Vested Finance, a US-based investment platform, stated, “Spot bitcoin ETF provides a straightforward and regulated option for long-term crypto investors to add crypto exposure to their portfolios, although it’s not suitable for traders, as trading US stocks and ETFs is not permitted.”
How do spot bitcoin ETFs function?
Similar to ETFs in India, which track indices like Sensex or Nifty or commodities such as silver or gold, spot bitcoin ETFs are traded on conventional US exchanges, reflecting the value of bitcoin.
Existing investors won’t need separate accounts on cryptocurrency exchanges, and they won’t have to invest directly in bitcoin to benefit from the digital asset’s price appreciation.
Indian investors opting for Bitcoin ETF exposure can easily do so through regulated entities, eliminating concerns about cryptocurrency storage.
Spot bitcoin ETF assets comprise bitcoin purchased from cryptocurrency exchanges and secured through custodians. Some ETFs may also track specific bitcoin-based indices.
What are the tax advantages of bitcoin ETFs?
Different Indian taxation provisions apply to capital gains from equity funds, debt funds (including overseas mutual funds), crypto assets, and overseas investments via LRS.
In India, capital gains from crypto assets are subject to a flat 30 percent tax rate. Furthermore, losses from one crypto cannot offset gains from another, and there is no provision for carrying forward losses to future years, in contrast to taxation rules for equities and equity funds, which feature lower tax rates and loss offsets.
Additionally, a 1 percent Tax Deducted at Source (TDS) is applicable to each transfer of digital assets on domestic crypto exchanges.
These taxation regulations were introduced with the Finance Act 2022, incorporating Section 115BBH.
Viram Shah explained, “The 1 percent TDS on crypto transactions won’t apply to bitcoin ETFs in the US, as no actual cryptocurrency is purchased, and capital gains tax will be lower.”
Under the LRS route, short-term (less than 36 months) capital gains from spot bitcoin ETFs are subject to tax based on the individual’s tax slab, while long-term capital gains are taxed at 20 percent with indexation benefits. This compares to the flat 30 percent tax rate for Bitcoin or crypto investments in India.
Importantly, overseas mutual funds in India are now taxed at the marginal tax rate across tenures, departing from the prior practice of long-term capital gains with indexation beyond three years.
What are the cost implications of investing in spot bitcoin ETFs?
In 2023, the government introduced a 20 percent Tax Collected at Source (TCS) on deposits exceeding Rs 7 lakh via LRS, which is also applicable to investments in spot bitcoin ETFs.
While a 20 percent TCS may result in locked liquidity, unlike the 1 percent TDS on Indian crypto investments, TCS can offset other tax liabilities.
However, apart from TCS, direct investments in overseas markets incur additional charges such as bank fees, brokerage costs, and foreign exchange rates.
Additionally, there are management fees, or expense ratios, associated with investing in spot bitcoin ETFs. For example, BlackRock intends to impose a 0.3 percent fee, while ARK has announced a fee of 0.25 percent.
Viram Shah added, “Another potential hurdle is that remittance under LRS, which Indian investors are still adapting to, is not as straightforward as UPI, where credit and debit transactions are very simple.”
What would be the impact on Indian policy?
In India, the crypto ecosystem eagerly awaits regulations for digital assets, a process underway within the government for several years.
While the Cryptocurrency and Regulation of Official Digital Currency Bill was listed by the government in November 2021, it was never discussed. However, in 2022, the Centre introduced tax rules for virtual digital assets (VDAs).
Nischal Shetty, Co-Founder of Shardeum, believes that the approval of bitcoin ETFs in the US paves the way for similar ETFs to launch in traditional financial markets worldwide, including India.
Meanwhile, Ajeet Khurana, Founder of Reflexible Pte Ltd, suggests that the US has set a precedent by introducing instrument-specific regulations. He said, “If in the future, the Indian government allows Indians to financially expose themselves to bitcoin but not explore other bitcoin attributes, we could have an instrument similar to the spot bitcoin ETF.”
However, experts also acknowledge that the Indian financial market ecosystem differs significantly from that of the US, which could affect the approval of products like spot bitcoin ETFs.
Regulators in India and worldwide will closely monitor ETF activity in the coming days. Structural distinctions between Indian and US ETF markets will play a significant role. India maintains a predominantly retail-driven market, and consumer protection issues have been frequently raised by the RBI, impacting how regulators view this asset class.
Would Indians be interested in spot bitcoin ETF?
Crypto experts unanimously consider the introduction of spot bitcoin ETFs a noteworthy milestone, bridging traditional financial markets with the innovative domain of digital assets.
Shivam Thakral, CEO of BuyUcoin, a digital asset exchange, stated, “A regulated bitcoin financial product approved by a major global financial regulator like the SEC will enhance the credibility of digital assets, instilling trust among institutional investors and encouraging traditional financial institutions to enter this space.”
However, while ETFs based on bitcoin futures were approved by the US SEC in 2021, they failed to gain traction among Indian investors due to difficulties in precisely tracking bitcoin’s price and the erosion of returns associated with rolling over futures contracts, diminishing their appeal.
Crypto experts believe that it remains to be seen whether spot bitcoin ETFs will generate substantial demand among Indian investors.