Nikhil Kamath | Crypto Tax: Nikhil Kamath on Vauld Suspends Operations, Taxation, and Other Upheavals in the Crypto Space

“If the cost of mining is significantly higher than the cost these bitcoins are trading at, how long before miners have to take a break because they are big investment organizations and they have invested a lot of money in their mining operations. It would be an interesting phenomenon to observe,” says Nikhil KamatCo-founder & DSI, Zerodha.


You have been pretty consistent when it comes to your stance on cryptos. You always said you don’t understand it and you’re not going to invest in it. When you hear about Vauld, a crypto exchange, suspending all functions, what is your reaction?

Well, to some extent, apart from the debate of whether or not this is a good asset class, we can agree that the leverage inherent in this ecosystem was quite high and maybe a few months ago the prices had gone up too much and didn’t look justified for many people.

I don’t think any asset class can keep rising indefinitely, let alone cryptos. So I think the correction was largely justified and I don’t think that’s a bad thing. We have been lucky in India with the arrival of the regulator which makes it more difficult to buy crypto. Kudos to RBI, Sebi, the Ministry of Finance – whoever was involved in this decision because a big part of the retail mindset is usually that when something drops a lot they tend to borrow and buy a lot more.

But I think they weren’t able to because it became a lot harder for them to fund their crypto wallets and stuff like that. So the RBI definitely got that spot. But where we’re sitting today at $19,000 or $20,000 is a radically different question. Creditworthiness is definitely a concern today. There is another key question of what the cost of mining is today compared to the cost of a Bitcoin on the open market.

If the cost of mining is significantly higher than the cost these bitcoins are trading at, how long before miners need to take a break because they are big investment organizations and they have invested a lot of money in their mining operations. This would be an interesting phenomenon to observe and at some level it would also determine the direction of prices in the near future.

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Vauld does not allow withdrawals. There are reports that CoinDCX has also halted withdrawals. You are working with a different asset class which is equities, which is much more mature than cryptos but still has a long way to go in India in terms of penetration. When you hear about a new tax that could impact trading volumes, a new tax that could lead to gray market trading, what do you think? Since equity investors have no choice, will they still enter the market? It’s not like they don’t want tax cuts!
There is even talk today of an increase in the tax on long-term capital gains. I don’t think taxation alone is going to stop people from coming to invest in stocks because it’s still one of the only places you can hedge against inflation and you’re basically buying the companies, the for-profit companies, the biggest in the Indian ecosystem, you buy a small chunk of it when you buy a listed share.

There is a lot of compliance, every company that is listed has to publish its balance sheet every quarter, there are calls from investors, these companies go out and defend their profits, their plans for the future, all that. I keep saying I shouldn’t be skeptical of something I’m not an expert on but even though I might not be an expert in bitcoin or ethereum or something like that they have a tangible enterprise that is open to everyone to interpret. I think that makes a huge difference.

Nikhil, do you have anything to say about cryptos being taxed more unfairly than stocks?
I agree. 1% TDS kind of kills the market as it would on any other asset class. We must return to the intention. If the intention of the regulator is not to let the crypto industry thrive in India, I think what they have done has achieved that result. But when you go back and wonder if it has helped the retail audience, the fact that people have not been able to buy crypto for the last few months in the fall, the answer is yes. Without that, and without the volumes falling as much as they did, more retailers would have been sucked into the fall and continued to buy until the drop. Net-net would have been bad for the ecosystem.

In many ways this is also the problem, maybe it is the advantage of crypto but also a crypto problem. For shares, there is a custodian who checks whether your shares are there, you have a regulator, you have a stock exchange. There’s SEBI, RBI and they verify to the extent that if a broker holds a certain amount of client funds, they continue to verify that the funds exist, that there is a demarcation, that those funds are not used for something else.

There is so much compliance in place. A lot of that doesn’t exist in the crypto world and it’s easy for me to say if these rules and if these checks and balances were implemented people might have more faith in crypto exchanges and the like , but it also takes away the use case of crypto in a way and what makes it different from stock markets to begin with.

So it’s a very complicated problem or a complicated question to answer. I don’t think it’s a binary yes or no. I would argue that what works in favor of equity is the huge regulation that ensures safety of client capital and funds.

Will the Income Tax Act allow even illegal sources of income to be taxed? When the government levies a tax on an asset class that it has not yet decided to recognize, it is legitimate and not legitimate. The government should also have laws to protect those same users and depositors, because there is no protection. We don’t know what will happen to anyone who has invested in crypto on potentially failing exchanges?
I was looking at the documentation on some Stablecoins and some of the exchanges especially those outside of India and if one reads the fine print a lot of these guys like they openly claim that during the sale they can stop withdrawals and stop trading and all that. So you have to a) be really sure what exchange and bridge they are using and what the concept of stablecoin is. If they don’t disclose what’s supporting it and what happened to their money that went into it, one might wonder how stable it really is.

People really need to do some research to know which route to choose. In terms of monitoring and compliance on Indian exchanges, the very USP of crypto is its decentralized nature. I guess it would be a lot harder to track and have the same kind of compliance around say bitcoin or ethereum than it could be with the share of

where you have KYC on the buyer, lenders, where the exchanges are and the route it takes through a broker.

I don’t quite see how you could have that level of compliance on something that’s much more decentralized and where you often don’t see both sides of the transaction.

You talk about an exchange that convinced the founders of PayPal, Valar Ventures, to invest. He had convinced Coinbase to invest. I don’t know if regulations alone are necessary, but there is still a lot to do. Now, there are reports coming out of how social media influencers have been paid to talk about it. Is it the dirty side that comes out now?
I think something needs to be done about social media influencers – be it Matt Damon or all the people who have come out and said invest in this and earn 15% or 20% guaranteed. If someone has made a financial gain by selling a certain product or service, there must be financial responsibility for them when those things don’t work. I don’t know how people can be regulated or how they would put a law around this, but something definitely needs to be done about it.