Fear and despair echoes in crypto industry after govt refuses to allow offsetting losses

Industry executives feared that this would obstruct growth and drive investors away from trading legitimately in cryptocurrencies. They also believe this defeats the purpose of the taxes the government has proposed.

“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,” said Nischal Shetty, CEO, WazirX.

In a reply to a question, the Minister of State for Finance in Lok Sabha on Monday said, “As per the provisions of the proposed section 115BBH to the Income-tax Act 1961, loss from the transfer of VDA (Virtual Digital Assets) will not be allowed to be set off against the income arising from transfer of another VDA.”

Section 115BBH is a newly proposed section in the Income Tax Act that seeks to define and add a provision to tax gains from VDAs like cryptocurrencies. Taxes include 30 per cent on profits and 1 per cent TDS to be collected by exchanges.

“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 & CEO, CoinSwitch.

The clarification also said investors and miners will not be allowed to deduct infrastructure costs incurred in acquiring the cryptocurrencies. This will also drive people away from cryptocurrencies as mining requires a lot of electricity which can be costly, and a 30 per cent tax without deduction will eat away much of the margins for small-time miners.

“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,” said Singhal.

Recognition in the taxation law had given some hope for crypto enthusiasts and the industry, which operates in a legally ambiguous area. But the way the government is calculating tax liabilities signals that it is not in favour of encouraging investment in Bitcoin and other cryptocurrencies. This is despite reports that have said the government may introduce a Bill to regulate them.