Crypto mining infrastructure cost not treated as cost of acquisition

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    photo New Delhi/Mumbai: Tax deduction of mining costs of cryptocurrencies and other virtual digital assets (VDAs) and set-off of loss from any VDA transfer against income from another transfer will not be allowed, the government said on Monday, in a setback for the industry.

    “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,” minister of state for finance Pankaj Chaudhary said in the Lok Sabha.

    Responding to a question from Congress member Karti Chidambaram, the minister also said loss from transfer of VDA will not be allowed to be set off against income arising from transfer of another VDA. “No deduction in respect of any expenditure other than the cost of acquisition will be allowed,” he said.

    The cryptocurrency industry said the decision to disallow offset between different cryptos and mining expenses is regressive and will discourage investor participation.

    The 2022-23 budget has proposed levying income-tax of 30% on crypto assets with effect from April 1.

    “The (Finance) Bill also proposes to define VDA,” Chaudhary said. “If any asset falls within the proposed definition, such virtual asset will be considered as VDA for the purposes of the Act and other provisions of the Act will apply accordingly.”

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    The government will come out with a definition of virtual digital assets with a view to levy 30% tax on income from the transfer of such assets, he said.

    Industry seeks review:

    The cryptocurrency industry urged the government to review its decision as it may drive away investors from authorised platforms to grey markets.

    “Treating profits and losses of each market pair separately will discourage crypto participation and throttle the industry’s growth,” said Nischal Shetty, CEO of WazirX. “It’s very unfortunate, and we urge the government to reconsider this.”

    Ashish Singhal, cofounder and CEO of CoinSwitch, said, “This is detrimental for India’s crypto industry and the millions who have invested in this emerging asset class.”

    He said it is feared that 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.

    “The budget recognised virtual digital assets 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,” Singhal said.

    He said the latest clarification is a step backwards. “If a regressive provision such as this would have been applicable in equities, it would have discouraged retail investors from participating.”

    “It’s a continued effort to isolate and disincentivise cryptocurrency related activities in India,” said Rohinton Sidhwa, partner at Deloitte India.

    While the mining expense disallowance was unlikely to impact majority of traders, prevention of offset between different cryptos will probably negatively impact many traders, he said.

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