More than six months after lakhs of Indian crypto users lost their cryptocurrency funds in the Rs 2000 crore WazirX crypto exchange hack, the tectonic plates are finally shifting in the case, with users hopeful of receiving a significant portion of their locked funds. However, the recent decision by Indian government to apply 70% penalty on any undisclosed gains on crypto has dampened the spirit of WazirX users.
Recently, the Singapore High Court approved a restructuring plan proposed by WazirX management under which the exchange users will receive 75-80% of the lost funds through various combinations such as liquid assets, recovery tokens, and potential future profits, the coming few months. But many are questioning whether they will be liable to pay up to 70% penalty tax if and when they receive the compensation tokens from WazirX management.
India’s strict crypto tax framework could create trouble for users receiving these restructured payments, compounded by new penalties for non-compliance. The Indian government had not offered any assistance to WazirX users whose funds remain locked arbitrarily for the past six months since the hack. In this article, we will understand whether WazirX users stand to gain or lose the most with new government regulations on crypto.
How WazirX Token Distribution Can Trigger High-Taxable Event in India?
The token distribution by WazirX management may introduce nuanced tax implications that could catch many investors off guard. And the reason behind saying this is because as per the Indian laws, if the tax is unpaid for 4 years (36 months), the penalty is 70% plus interest.
The whole event depends on three key aspects, first the pre-hack valuations of the tokens, then the restructuring outcome, and last the current market price of the asset.
For instance, assume a user named Nischal, who have previously 100 XRP.
- Pre-Hack Valuation: Assuming Nischal brought XRP for $0.55 per token.
- Restructuring Outcome: Now after the restructuring process he is getting 10 XRP in USDT form.
- Current Market Price: Currently, XRP is trading at the price of $1.55.
If this is the whole scenario, the recovered token represents an unrealized gain of $1.The $10 gain is taxed at 30% plus 4% cess, a total of $3.12. Besides this, the token conversion through the restructuring scheme is also considered under a taxable transaction.
Moreover, most of the crypto trading is not disclosed, so if anyone is caught with unreported crypto gains, they will have to pay these fines. if tax is unpaid for 4 years ( 36 months), the penalty is 70% plus interest as per the official Income-tax reforms by the Indian government.
Tax Treatment Under India’s Crypto Laws
- Flat 30% Tax: According to the Indian government, gains from the crypto are subject to 30% tax + 4% cess, regardless of the holding period. Furthermore, losses cannot offset gains.
- 1% TDS: There is 1% TDS if transaction values exceed ₹10,000
- Heavy Penalty On Unreported Gains: According to the latest tax rules, there is a 70% penalty on unreported gains from the past four years, effective February 2025.
Complexities in Tracking Liabilities of WazirX
There are so many complexities and challenges while tracking WazirX’s restructuring process. The restructuring process does not give full fund recovery which creates additional ambiguity in tax assessment. Moreover, WazirX also plans to provide future profit-sharing through recovery tokens which are not yet taxable until converted to liquid assets or sold.
In addition, there are some regulatory risks. Under Section 285BAA, a crypto platform must disclose transaction details that advance audit risk for users.
What Should the WazirX Users Do?
Users should maintain all records of original purchase receipts, hack-related claims, and token distribution timelines. Besides this users should use crypto tax software to calculate their tax calculations. Users can also consult with a professional tax expert for their tax calculations and future implementations.
Conclusion
WazirX recovery plans may be a ray of hope for the investors but it also opens the doors to complex tax challenges for them. User should keep a record of every document, information, and their asset data to be vigilant. Not only this they should take professional advice regarding all this scenario.
However, the real story will unfold when the users will actually receive their lost tokens. It is the responsibility of the WazirX management to provide clear information on the tax regarding recovery tokens.
Also Read: WazirX crosses first hurdle, Can Nischal win trust of users again?
