Indian billionaire Kamath has surprising response to surge in crypto options

Indian billionaire Nithin Kamath has expressed his surprise at the rising popularity of crypto futures and options in the country. He said,

"These Indian crypto platforms seem to be thriving in a regulatory grey zone, and because of lower taxes and extreme leverage in derivatives."

Kamath and his brother Nikhil are the co-founders of the popular India-based brokerage platform Zerodha. Though Zerodha offers stocks, derivatives, mutual funds, etc. to trade, it doesn't yet offer cryptocurrencies.

The billionaire was responding to a recent news report published by The Economic Times that highlighted crypto futures trading surpassing spot trading in India.

Futures are leveraged trades where a trader can gain exposure of as high as 10 times the margin. It means that a price rise of $100 gives the trader a return of $1,000.

But why futures are surpassing spot trading in India can be explained by the complex nature of crypto trading in India.

Crypto in India: Multiple taxes but unclear status

While the crypto assets are categorized as neither securities nor currencies, crypto trading invites a tax deducted at source (TDS) of 1% on each transaction and a 30% tax on profits.

However, trading crypto futures doesn't invite a TDS, as a trader is dealing with derivatives, not crypto assets themselves.

Gains from futures are reported as "income from other sources," which is taxed as per the income slab, and a trader can use a non-earning family member's account for trading crypto futures so as to pay less than 30% tax on profits, the ET report mentioned.

There is another factor too behind the rise of crypto futures in India, as per the report.

Of late, Indian crypto exchanges have begun accepting margins in the national currency, the rupee (INR).

While crypto exchanges abroad accept margins in stablecoins like USDT, not fiat currency like the U.S. dollar, Indian exchanges use the INR received as margin from traders to buy USDT and cut a countertrade with a global exchange like Binance to execute the futures trade.

Thus, Indian exchanges convert INR into USDT to access a larger futures order book — transactions on which exchanges would be paying a TDS.

However, the margin acquired in USDT is then used for trading futures multiple times, inviting no TDS. If it were spot trading, every transaction would invite a TDS. Though only 1%, taxes on multiple transactions can become a heavy burden.