The government on Monday clarified that crypto investors will not be allowed to set off losses incurred from one cryptocurrency against the income from another cryptocurrency. The announcement was first made by Finance Minister Nirmala Sitharaman in her budget speech as she proposed a 30 per cent tax on capital gains from crypto assets with effect from April 1, 2022.
“As per the provisions of the proposed section 115BBH to the Income-tax Act, 1961, loss from the transfer of virtual digital asset (VDA) will not be allowed to be set off against the income arising from transfer of another VDA,” MoS Finance Pankaj Chaudhary said in a written reply to a question in Lok Sabha.
For example, if an investor had lost Rs 500 in Bitcoin and gained Rs 800 in Ethereum in two separate transactions, he/she would still be taxed at 30 per cent (Rs 240) on Rs 800 to be left with net Rs 560. In case the investor was allowed to set off his/her loss in Bitcoin against his gains in Ethereum, he/she would have been taxed on Rs 300. The Finance Bill, 2022 had proposed to insert new section 115BBH to the Act for taxing income from transfer or sale of cryptos.
“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,” said Nischal Shetty, CEO, WazirX.
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Chaudhary was responding to the confusion around setting-off losses in one crypto against gains from another since losses incurred due to transfer of cryptos are not allowed to be set off against any other income. The MoS also noted that as per the provisions of the new section under the IT Act, infrastructure cost including computers and a large amount of electricity incurred in the mining of crypto assets won’t be deducted from income “as the same will be in nature of capital expenditure,” the minister added.
“It’s a continued effort to isolate and disincentivize cryptocurrency-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,” said Rohinton Sidhwa, Partner, Deloitte India.
According to the Finance Bill, 2022 tabled by Sitharaman in the Parliament in February, the only exception in terms of deduction was the cost of acquisition of digital assets. In other words, there would be no expenditure deduction other than the cost of acquisition. Sitharaman had also proposed a 1 per cent tax deducted at source (TDS) on proceeds of all crypto transactions.