The loss from the sale of one crypto will not be compensated by the gain from the sale of another crypto, the Ministry of Finance clarified in the Lok Sabha on Monday.

The ministry further explained that the cost of mining will not be treated as the cost of acquisition in the case of virtual digital assets (VDAs), a clarification that has triggered a chain of reactions from industry players. crypto and exchanges across the country who feared that these clarifications would “cripple” crypto trading.

While tax experts believe the explanation brings more clarity, crypto players have urged the government to reconsider.

Responding to a question posed by Karti Chaidambaram, MP for Sivaganga Constituency (Tamil Nadu), Minister of State for Finance Pankaj Chaudhary said in a written reply: “In accordance with the provisions of Section 115 BBH proposed to Income Tax Act 1961 (the Act), loss resulting from the transfer of one VDA will not be able to be offset against income resulting from the transfer of another VDA.

The Department of Finance uses the term virtual digital assets for cryptocurrencies.

The Finance Bill 2022 proposed that any income from the transfer of VDA be taxed at the rate of 30%. Further, in computing the income from such a transfer, no deduction is allowed for any expense (other than the cost of acquisition) or allowance. “According to the proposed provisions of Section 115 BBH, infrastructure costs incurred in the mining of VDA will not be treated as acquisition costs as they will be in the nature of capital expenditure which is not deductible in accordance with the provisions of the law. Take action,” the minister said on Monday. He also clarified that currently, cryptocurrencies are unregulated in India.

Crypto Players Stunned

Nischal Shetty, CEO of WazirX, has expressed concerns that treating the profits and losses of each market pair separately will discourage crypto participation and hinder industry growth. “It’s very unfortunate, and we urge the government to reconsider this,” he said.

Ashish Singhal, co-founder and CEO of CoinSwitch, also called them “detrimental” to India’s crypto industry and the millions of people who have invested in this emerging asset class. “We are concerned that the lack of provisions to offset losses could drive users away from KYC-compliant exchanges and platforms into the underground peer-to-peer gray market, which would defeat the purpose of tax,” he said.

Additionally, he said the budget recognizes VDAs as an emerging asset class. Therefore, a natural course of action would have been to gradually bring regulation up to par with other asset classes. “Instead, today, with this clarification, we took a step back. If a regressive provision like this had been applicable to stocks, it would have discouraged retail investors from participating,” he said.

Experts differ

However, Sandeep Jhunjhunwala, a partner at Nangia Andersen LLP, believed that the government’s clarification cleared up some doubts that stakeholders in the crypto ecosystem were grappling with. Since intra-head adjustment of losses, i.e. offsetting losses resulting from one VDA with income from another is not permitted, such losses would be a sunk cost to investors. , resulting in a double whammy – paying taxes on winnings and no compensation for losses.

“It will be interesting to see if the government provides further clarification on other contentious issues regarding VDA taxation, particularly that regarding withholding tax provisions on crypto transactions,” he said.

According to Deloitte India partner Rohinton Sidhwa, this is an ongoing effort to isolate and discourage cryptocurrency-related activities in India. “Disallowing mining spending is unlikely to impact the majority of traders, however, preventing clearing between different cryptos is likely to negatively impact many traders,” he said.

Published on

March 21, 2022