Tax on crypto set to fuel grey trading

Emerging Asset Class

- 30% tax on any income from transfer of virtual digital assets (VDAs)

- Loss from transfer of VDA will not be allowed to be set off against the income arising from transfer of another VDA

- Experts say it would discourage retail investors

Mumbai: In spite of the deduction of tax on virtual digital assets (VDA) by the government, experts believe that it will be having a detrimental impact on the stakeholders.

In the Budget-2022, the government proposed to levy income-tax (I-T) on crypto assets. It was proposed that from April 1, a 30 per cent I-T plus cess and surcharges will be levied on such transactions in the same manner as it treats winning from horse races or other speculative transactions.

The government has stated that infrastructure costs incurred in the mining of cryptocurrencies or any virtual digital assets will not be allowed as deductions under the Income-Tax Act. The stakeholders are demanding to bring the regulations at par with other asset classes.

Following the clarification of offsetting crypto losses provided by Minister of State (MoS) for Finance Pankaj Chaudhary on Monday, Ashish Singhal, co-founder & CEO, CoinSwitch, talking to Bizz Buzz 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."

Currently, cryptocurrencies are unregulated in India. The Budget recognised virtual digital assets (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 added.

The Finance Bill-2022 has proposed to insert section 115BBH to the Income-tax Act-1961 to provide for taxation of income from transfer of virtual digitat assets (VDA). As per the proposed section, any income from transfer of VDA shall be taxed at the rate of 30 per cent. Further while computing the income from transfer of VDA, no deduction in respect of any expenditure (other than cost of acquisition) or allowance is allowed.

The Bill, which was introduced by the Finance Minister in the Union Budget, also proposes to define VDA if any asset falls within in the proposed definition, such virtual asset will be considered as VDA for the purposes of the Act another provisions of the Act wail apply accordingly. As per the proposed provisions of section 1158BH, infrastructure costs incurred in mining of VDA (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 as per the provisions of the Act. As per the provisions at the proposed section 1188BH to the Income-Tax Act-1961, loss from the transfer of VDA will not be allowed to be sold off against the income arising from transfer of another VDA.

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

- Ashish Singhal, co-founder & CEO, CoinSwitch