Govt Deals Another Blow To Cryptos, Losses From Digital Assets Can’t Be Set Off

In a written reply in the Lok Sabha on Monday, Minister of State for Finance Pankaj Chaudhary clarified 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.

The Clarification

As per the provisions of the proposed Section 115BBH of the Income-Tax Act, 1961 (the Act), the loss from the transfer of a VDA will not be allowed to be set off against the income arising from the transfer of another VDA, says the written reply presented by Chaudhary.

The minister also addressed a query on infrastructure costs incurred in mining cryptocurrencies. As per the proposed provisions of Section 115BBH, infrastructure costs incurred in the mining of VDA (for example, crypto assets) will not be treated as the cost of acquisition, as the same will be in the nature of capital expenditure, which is not allowable as a deduction as per the provisions of the Act, says the statement.

The finance ministry also clarified that the cryptocurrency sector is unregulated. "The legal framework for the sector may be finalised only after all aspects are carefully examined in consultation with the stakeholders concerned.

A Blow To Industry

The proposed Section 115 BBH, under which the 30 per cent tax on crypto transactions was introduced in the Budget Session, clearly specifies that no deduction other than the cost of buying the said VDA shall be allowed as a deduction while computing the tax payable. However, clarity was awaited on whether set-off of losses would be allowed against gains from another digital asset.

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As seen along with the steep taxation of 30 percent (to be implemented from April 1, 2022) and the proposed 1 percent tax deducted at source (TDS) (to be implemented on July 1, 2022) on all crypto transactions, the latest clarification will deal another blow to the prospects of the crypto industry, as the earlier Outlook Money article indicated too.

Industry Reaction

Predictably, the clarification seems to have upset the crypto industry, which said it may deter people from investing in cryptocurrencies going forward.

"This is detrimental to 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 users away from KYC-compliant exchanges and platforms to the underground peer-to-peer grey market, which would defeat the purpose of the tax," said Ashish Singhal, co-founder and CEO of CoinSwitch, a crypto exchange, in a statement.

Rohintan Sidhwa, partner, Deloitte India, also reacted to the development without much enthusiasm.

He said in a statement: "It’s a continued effort to isolate and disincentivise crypto currency related activities in India." The mining expense disallowance is unlikely to impact the majority of traders. However, the prevention of offset between different cryptos will probably negatively impact many traders. "

Considering the profits and losses of each market pair separately will discourage crypto participation and slow the industry's growth."It’s very unfortunate, and we urge the government to reconsider this," he said.

Shetty also explained the taxation idea by taking an example: if a person invested Rs 100 in Coin1 and Rs 100 in Coin2, the total investment of the investor would come to Rs 200. However, if he makes a profit of Rs. 100 in Coin1 and a loss of Rs. 100 in Coin2, he will have to pay a 30% profit for Coin1 because he will not be able to offset Coin2 losses.