Crypto industry miffed by govt's position on barring tax deductions

Losses from one kind of VDA like cryptos and NFTs can't be set off against gains from another. Infra cost in mining such assets won't be allowed to be used for availing any deductions

Crypto players on Monday strongly reacted to the government’s position in the Lok Sabha that restricted ways for investors to avail deductions from trading in such virtual assets. This move will hurt the industry and incentivise users to look for underground platforms for trading, according to them.

“Not being able to offset the losses of one virtual digital asset with another will discourage a lot of investors as it increases their risk and decreases the end reward. This would disincentivize them from trading with Indian exchanges and deal only with foreign exchanges or decentralized exchanges,” said Bhagaban Behera, co-founder and CEO of blockchain start-up Defy.

“The proposed tax framework on digital assets would lead to a decline of the blockchain industry in India and talent and companies would eventually move outside,” he added.

Responding to a question on crypto taxation provisions announced in the Budget, FinMin MoS Pankaj Chaudhary said on Monday that losses from one kind of VDA like cryptos and NFTs cannot be set off against gains from another. He also said that any infrastructure cost in mining such assets will not be allowed to be used for availing any deductions.

“Negating those expenses from deductibles is like negating the salary of people working in an IT company as cost incurred. While we are confident the government will come up with a more mature structure for this purpose, the interim will see a lot of crypto miners leaving our nation,” said Arjun Reddy, CTO of NFT start-up Guardian Link.

Other quarters of the crypto industry feel that such a move on taxation will disincentivise crypto traders from using KYC (know your customer) -compliant exchanges and the users will move to underground methods such as decentralised exchanges and accessing foriegn platforms through virtual private networks.

“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,” said Ashish Singhal, co-founder and CEO of crypo exchange CoinSwitch Kuber.

“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.

Nischal Shetty, co-founder and CEO of WazirX, also had similar concerns. “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,” he said.

FM Nirmala Sitharaman had announced a 30 per cent tax on any income from the transfer of virtual/digital assets in this year’s Union Budget.