Crypto tax clarification ‘detrimental’ and ‘restrictive’ to investor sentiment: Experts

The cryptocurrency industry is urging the government to reconsider its latest clarification on how crypto taxes will work and has termed the new measures as detrimental to the market. The reaction comes as Miner of State for Finance Pankaj Chaudhary clarified in Parliament that losses incurred from one kind of cryptocurrency cannot be offset against the gains from any transaction involving another cryptocurrency.
“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,” Nischal Shetty, CEO, WazirX said in a statement.
He also illustrated how this crypto taxation would work with an example on his Twitter handle. For instance, if a user invests Rs 100 into Coin 1 (say Bitcoin) and Rs 100 into Coin 2 (say Ethereum), their total investment would be Rs 200. Now, if they make Rs 100 profit in Coin 1 and lose Rs 100 in Coin 2, they will still have to pay 30 per cent for Coin 1 profit since the government does not allow offsetting the Coin 2 loss. So, ultimately a user would be left with Rs 170, which is a loss.
This also means that customers have to figure out the taxation for every different token they trade-in.
This clarification comes after Finance Miner Nirmala Sitharaman announced in the Budget session a flat 30 per cent tax on income from transfer of crypto and other virtual digital currencies starting April 1, 2022.

Ashish Singhal, co-founder and CEO of cryptocurrency exchange CoinSwitch, issued a statement, calling this development detrimental for India’s crypto industry and the millions who have invested in this emerging asset class, stating that this would  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 (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,” Singhal said.
According to Sathvik Vishwanath, CEO, the move is a negative step “for investors and the industry.” The announcements on taxation structure “appears to be restrictive and may disincentivise investors in the long run,” noted Ashish Kumar, General Partner at Fundamentum Partnership.
Meanwhile, the government also clarified that infrastructure costs incurred in the mining of cryptocurrencies or any virtual digital assets will not be allowed as a deduction under the Income Tax Act.
“Infrastructure costs incurred in the mining of VDA (e.g. 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 a deduction under the I-T Act,” Chaudhary added.