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Crypto tax: Government clarifies that losses cannot be set off between trades of different tokens

The industry has deemed this move as 'detrimental' to investor sentiment and has asked the government to reconsider the decision. MoS Finance Pankaj Chaudhary also clarified that costs incurred for mining infrastructure will not be deductible as costs of acquisition.

March 21, 2022 / 05:25 PM IST
Representative image

Representative image

In a setback for crypto investors and trading platforms, Minister of State for Finance Pankaj Chaudhary said in the Lok Sabha on March 21 that losses incurred from one kind of virtual digital assets (VDAs) cannot be set off against the gains from any transaction involving another VDA while computing tax.

Since Finance Minister Nirmala Sitharaman announced a hefty 30 percent tax on gains from VDAs in the Budget, which includes gains from crypto trading, the industry as well as investors were awaiting clarity on how exactly the taxation will work.

The answer was given in response to queries by Member of Lok Sabha Karti P Chidamabaram.

MoS Finance Chaudhry said, "As per the provisions of the proposed section 115BBH to the Income Tax Act, 1961, loss from transfer of VDA will not be set off against the income arising from transfer of another VDA."

The clarification in the Lok Sabha means that investors will have to pay a 30 percent tax for every gain they make and losses are not deductible from the final taxation amount if different tokens are traded.

For example, if an investor has earned Rs 1,000 in one crypto trade involving Token A and incurred losses worth Rs 400 in another trade involving Token B, they still have to pay a 30 percent tax on the Rs 1,000 profit. In a scenario where losses would have been allowed to set off against gains from other tokens as well, the investor would have had to pay tax only on the net Rs 600.

The industry views this as a move that is 'detrimental' to investor sentiment and may discourage people from making further investments.

Ashish Singhal, Co-founder and CEO of CoinSwitch said, "This is detrimental for India’s crypto industry and the millions who have invested in this emerging asset class. We fear the lack of provision to offset losses will drive away users from KYC-compliant exchanges and platforms to the underground peer-to-peer grey market, which would defeat the purpose of the tax."

Singhal added that the move is also regressive and not in line with the Government's recognition of VDAs as an emerging asset class.

"A natural course of action would have been to progressively bring the regulations at par with other asset classes. Instead, today, with this clarification, we have taken a step backwards. If a regressive provision such as this would have been applicable in equities, it would have discouraged retail investors from participating,” he added.

WazirX's CEO Nishchal Shetty said, "Treating profits and losses of each market pair separately will discourage crypto participation and throttle the industry's growth. It’s very unfortunate, and we urge the government to reconsider this."

Many are viewing this as a move that puts the burden of losses on investors while the government will continue to earn revenue from the heavy taxes.

Sathvik Vishwanath, CEO and Founder of Unocoin said, "Customers have to figure out the taxation for every different token they trade in. This is a huge negative for investors and the industry."

Along with the 30 percent tax which will be applicable starting April 1, 2023, and the taxes will be levied from the assessment year FY24, the government has also proposed a 1 percent tax deduction at source (TDS) which will ensure a KYC process requirement for trading as well help keep a track of transactions in the country.

Besides this, MoS Finance also clarified that while the cost of acquisition is deductible from overall gains, mining infrastructure is not considered for the same, a point that the industry was keenly awaiting clarity on.

Mining is the process of generating new coins and verifying new transactions on a blockchain, which involves a lot of processing power and computers on the network. To put it simply, the miners maintain and secure the blockchain. In return, they are rewarded in cryptocurrencies for the mining.

"Infrastructure costs incurred in mining of VDA (eg. crypto assets) will not be treated as cost of acquisition as the same will be in the nature of capital expenditure which is not allowable as deduction," the minister answered.

With high costs on one side and a steep tax rate on the gains on the other, mining too will become a less attractive proposition in the country. However, India made up a very small share of crypto mining globally as electricity costs are much higher in India as compared to other countries.

Power typically costs between 7-11 cents per kilowatt-hour in India, on average, each year, while in Kazakhstan power costs around four to five cents, making the country a preferred destination for crypto miners. The global average, too, is at 5 cents, according to data by the University of Cambridge’s Bitcoin Electricity Consumption Index (CBECI).

According to the latest data by CBECI, India’s average monthly hashrate share in August 2021 stood at a mere 0.05 percent. Hashrate is the measure of the amount of computational power used while mining and processing cryptocurrency transactions, in this case, Bitcoin.

The average monthly hashrate share of countries like the United States and Kazakhstan stood at 35.40 percent and 18.10 percent, respectively, in August 2021.

The cryptocurrency industry has already made representations to the government to reconsider the 1 percent TDS and to give relief on the 30 percent tax rate as it will deter new as well as current investors. Also, the current rulings subject crypto transactions to the same stringent measures that social evils like betting and gambling are accorded, which potentially dampens the creditworthiness of crypto as an asset.

Priyanka Iyer