The crypto industry received a major blow on Monday when the government clarified that it will not allow investors to set off losses in one crypto asset against losses suffered in another digital asset.
The gains from buying and selling Bitcoin, therefore, cannot be offset against the losses incurred on trade in Ethereum or any other crypto assets.
Crypto players had expected the set-off especially after the industry was slapped with a 30 per cent tax on income from the transfer of virtual digital assets in the budget. The budget had also proposed a 1 per cent TDS on the transfer of such assets.
“Under the provisions of the proposed section 115BBH to the Income Tax Act, loss from the transfer of VDA will not be allowed to be set off against the income arising from transfer of another VDA,” Pankaj Chaudhary, Union minister of state of finance, said in a reply to a query from Lok Sabha member Karti P. Chidambaram on the status of crypto currency.
Tax experts and the crypto industry were awaiting clarity on whether investors would be allowed to set off losses on crypto assets in the backdrop of the 30 per cent tax and the TDS provisions.
The decision not to allow the set-off shows the government has hardened its stand on crypto trading.
Initially, the officials of the Central Board of Direct Taxes (CBDT) had considered the set-off as valid and had assured the industry they would look into the matter.
The government further said infrastructure costs incurred in the mining of crypto assets will not be treated as the cost of acquisition and will be in the nature of capital expenditure on which there will be no deduction.
“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,” said Ashish Singhal, co-founder and CEO, CoinSwitch.
“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, 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,” Singhal said.
In a separate question, Chaudhary said the cryptocurrency sector is unregulated at present. A legal framework may be finalised in consultation with the stakeholders.
