Minister of State for Finance Pankaj Choudhary, in response to a question by Congress MP Karti Chidambaram in Lok Sabha, said that no tax deduction will be available on mining cost of cryptocurrency or any other virtual digital asset. Also, if the investor suffers a loss in one digital asset transaction and gains in another, the loss cannot be adjusted (offsetting) with the gain. The crypto industry wanted both of these to be allowed. After the government’s clarification, he says that this will drive investors away from virtual digital assets. Let us understand what will be the effect of this rule on tax.
There are two types of expenses for the investor in virtual assets. One is the cost of mining a crypto asset and the other is the cost of that asset. The investor not only has to pay the cost of the asset, but also has to bear the cost of mining. The crypto industry wants the cost of mining to be included in the cost of purchasing the asset.
Income tax is calculated on the total annual income of any assessee. Income from different sources is combined. Even in share transactions, the investor makes profit in some shares and there may be a loss in some. According to the profit or loss made by him in the whole year, the liability of tax is made on him. Some losses are allowed to be offset and some losses are not. This offsetting can be done in three ways. Intra Head Adjustment, Inter Head Adjustment and Carry Forward.
If the income from multiple sources falls under the same head, then the loss from one source can be adjusted against the gain from the other source. This is called intra head adjustment. If two different types of heads have a loss in one and gain in the other, then the loss can be adjusted with the benefit. This is called inter head adjustment. If the loss in one head cannot be adjusted against any other head, then that loss is allowed to be carried forward to the next financial year.
But in the case of virtual digital assets, it is not allowed to do so. If the investor suffers a loss in this head, it cannot be adjusted against any other, nor can it be carried forward to the next financial year. In simple words, if there is a profit on the virtual digital asset, then tax will have to be paid, but if there is a loss, then there will be no tax exemption.
Suppose an investor has to pay Rs 15 for mining a crypto asset and Rs 85 for buying the asset. That is, its total cost was Rs 100. If he sells that asset for Rs 125, he has made a profit of Rs 25, on which he will have to pay tax. But the government has clarified that the cost of mining will not be included in the cost. That is, even if the investor has spent Rs 100, its cost will be considered as Rs 85, and on selling that asset for Rs 125, his profit will be considered as Rs 40. In this way he will have to pay tax on Rs 40 instead of Rs 25.
Finance Minister Nirmala Sitharaman has made a provision for levying income tax on crypto assets at the rate of 30 percent in the budget of 2022-23. Whether the profit is short term or long term, the tax rate will remain the same. Cess and surcharge will also be added on this. This rule will be effective from 1st April 2022. Non-fungible tokens ie NFTs will also come under the purview of digital assets. By the way, in terms of taxation, which asset will be considered as virtual digital asset, the government will also decide its definition. In the future, many types of digital assets may come in the market, so the government has kept the option open. It can bring any asset under the purview of virtual digital asset or exclude it through an ordinance.
The industry is demanding a review of this rule from the government. Companies providing platforms for buying and selling of digital assets have argued that if offset is not allowed, investors would prefer to go to the gray market instead of the authorized platform.
Reserve Bank of India has been against crypto currency from the beginning. Governor Shaktikanta Das has said that it will be risky for the country’s financial system. Not only the Reserve Bank, the central banks of many developed countries are also against the recognition of crypto currency. In the budget, the Finance Minister had said that the Reserve Bank will bring its own digital currency. It is expected that in the next financial year, the Reserve Bank will issue a digital rupee.
(Disclaimer: These are the personal views of the author. The author himself is responsible for the correctness / accuracy of any information given in the article. Tech for FTCPEnglish is not responsible in any way for this)
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