Loss from one crypto not to be set off with gain from another: FinMin

Loss from sale of one crypto will not be set off against the gain from the sale of another crypto, the Finance Ministry 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 (VDA), a clarification that set off a chain of reactions from crypto players and exchanges across the country who were anxious that these clarifications will “cripple” the crypto trade.

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

Responding to a question raised by Karti Chaidambaram, MP from Sivaganga constituency (Tamil Nadu), Minister of State for Finance Pankaj Chaudhary said in a written reply: ”As per the provisions of the proposed section 115 BBH to the Income Tax Act, 1961 (the Act), loss from the transfer of VDA will not be allowed to be set off against the income arising from transfer of another VDA.”

The Finance Ministry uses the term virtual digital assets for cryptocurrencies.

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Finance Bill, 2022, has proposed that any income from the transfer of VDA will be taxed at the rate of 30 per cent. Further, while computing the income from such a transfer, no deduction in respect of any expenditure (other than the cost of acquisition) or allowance is allowed. “As per the proposed provisions of section 115 BBH, infrastructure costs incurred in the mining of VDA 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 as per the provisions of the Act,” the minister said on Monday. He also clarified currently, cryptocurrencies are unregulated in India.

Crypto players stunned

Nischal Shetty, CEO of WazirX, expressed fears that 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,” he said.

Ashish Singhal, co-founder & CEO of CoinSwitch, also termed them ‘detrimental’ for India’s crypto industry and for 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,” he said.

Further, he said the Budget recognised VDAs as an emerging asset class. Therefore, 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 said.

Experts differ

However, Sandeep Jhunjhunwala, partner with Nangia Andersen LLP, felt the government’s clarification has laid to rest some doubts that stakeholders of crypto ecosystem had been grappling with. Since intra-head adjustment of losses, i.e., set-off of loss arising from one VDA with the income from another is not to be permitted, such losses would be a sunk cost for the investors, causing a double whammy – paying taxes on gains and no offset of losses.

“It will be interesting to see if the government provides further clarifications on other vexed issues surrounding taxation of VDAs, particularly the one around withholding tax provisions on crypto transactions,” he said.

According to Rohinton Sidhwa, partner with Deloitte India, it is 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,” he said.

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