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How Indian Taxation System can be Painful for Terra LUNA Investors

LUNA Crypto tax in India
LUNA Crypto tax in India

The sudden crash of the Terra Luna in early May was a black event that resulted in severe consequences for its investors and the crypto environment. Many investors lost their life savings, parked in the Terra coin, a stable coin with over 18 billion in market capital before the crash.

Terra USD and Luna token holders received the new amended coin known as Luna 2.0 via an “airdrop” because the stablecoin project failed. The Terra investors worldwide lost billions of dollars. As a result, this Luna 2.0 was distributed as compensation to recoup a small portion of their losses.

But Indians just got a little unlucky in this regard. They could be hit with a tax of up to 30% of the value of the tokens they received, with no way to offset gains in the new token against losses in the old.

As announced in the new Budget speech, effective from April 1, all income from any transfer of a virtual/ digital asset will be taxed at a fixed rate of 30% under the new crypto tax regime. But this regime does not specify how airdrops will supposedly be taxed. UST lost its peg to the dollar between May 5 and May 13, producing more LUNA tokens. The LUNA supply increased from 725 million to 7 trillion tokens in a week. From the time UST lost its peg until LUNA went from $100 to less than a dollar, the entire event took less than 48 hours.

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What Happened with Terra Luna – Is LUNA dead?

Here is a quick roundup of what went down for those unfamiliar with the entire LUNA fiasco. Stable coins are tokens that exist in the crypto economy. The price of a stablecoin is expected to be the same as a US dollar or another fiat currency.

They exist largely so that crypto investors may move in and out of fiat without requiring the approval of a third party (in this case, a bank). Tether (USDT), USD Coin (USDC), and Binance USD (BUSD) are just a few examples of stable coins on the market. Three of the above mentioned stable coins are tied to the central bank’s USD.

With the launch of Terra 2.0, it was suggested that the Terra network undergo a hard fork and the prior Luna tokens are renamed Luna Classic. This new Blockchain promised an airdrop to previous Luna and UST tokens holders.

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To deter investors from selling all of their Luna tokens at once, those who own more than 10,000 will receive just thirty percent of their tokens at once, with the remaining seventy percent shall be distributed over two years.

With a four-year vesting period, those who own more than a million tokens will have to wait a year to receive their tokens. According to data compiled by tracker Kaiko, the average pricing of the Luna 2.0 has stayed below eleven dollars in the last week since Terra distributed them.

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UST lost its peg to the dollar between May 5 and May 13, producing more LUNA tokens. The LUNA supply increased from 725 million to 7 trillion tokens in a week. From the time UST lost its peg until LUNA went from $100 to less than a dollar, the entire event took less than 48 hours.

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How Would the LUNA holders be Taxed?

According to Bloomberg, there will be two stages of taxes under the new tax framework, whether it is considered a gift or income from crypto.

First, a gift tax or a flat 30% tax will be applied when receiving the airdrop, based on the value of tokens at the time of credit. Secondly, considering tokens are sold, a direct tax of thirty per cent will be imposed on the additional income, irrespective of whether the tokens are classified or have an increment in value.

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There could be a situation where people receive tokens worth more than fifty thousand Indian rupees and it might be treated as a gift with one having to pay taxes on it, said the digital tax leader experts of India’s top tax legal firm Nishith Desai Associates. According to data available from CoinGeco, Luna 2.0 was in the market for trading from May 28 at $6.59 and a huge drop on June 3, down 9% in the previous 24 hours.

According to CoinMarketCap, Terra LUNA Classic (LUNC) and LUNA 2.0 are currently, as we write, trading at $0.00006 and $3.45, respectively.

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