Crypto mining cost not allowed as deduction under I-T Act

Infrastructure cost incurred in the mining of cryptocurrencies or any virtual digital assets will not be allowed as deduction under the Income Tax Act, Minister of State for Finance Pankaj Chaudhary said on Monday.

In a written reply to the Lok Sabha, Chaudhary said the government will come out with a definition of Virtual Digital Assets (VDA) with a view to levy 30 per cent tax on income from the transfer of such assets.

Also, loss from the transfer of VDA will not be allowed to be set off against the income arising from the transfer of another VDA, Chaudhary said.

He also said that currently cryptocurrencies are unregulated in India.

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The 2022-23 Budget has brought in clarity concerning the levy of income tax on crypto assets. From April 1, a 30 per cent I-T plus cess and surcharges will be levied on such transactions in the same manner as it treats winnings from horse races or other speculative transactions.

The minister said that while computing the income from transfer of VDA, no deduction in respect of any expenditure (other than the cost of acquisition) or allowance is allowed.

"The (Finance) Bill also proposes to define VDA. 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," he said.

Further, he said, "infrastructure costs incurred in the mining of VDA (eg. 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.

Nangia Andersen LLP Partner Sandeep Jhunjhunwala said since intra-head adjustment of losses, ie. set-off of loss arising from one VDA with the income from another VDA would not be permitted, such losses would be a sunk cost for the investors, causing a double whammy – paying taxes on gains and no offset of losses.

"This would lead to a situation where losses, say on account of transaction in altcoins (one VDA class) would not be permitted for set-off against gains on another VDA class, say any other programmable token or bitcoin," he said.

Disallowance of infrastructure cost incurred in mining cryptocurrencies costs, as a permissible revenue expenditure, would further increase the cost of mining these assets, Jhunjhunwala added.

Rohinton Sidhwa, Partner, Deloitte India said the mining expense disallowance is unlikely to impact the majority of traders, however, the prevention of offset between different cryptos will probably negatively impact many traders.

The Budget 2022-23 also proposed a 1 per cent TDS on payments towards virtual currencies beyond Rs 10,000 in a year and taxation of such gifts in the hands of the recipient. The threshold limit for TDS would be Rs 50,000 a year for specified persons, which include individuals/HUFs who are required to get their accounts audited under the I-T Act.

The provisions related to 1 per cent TDS will come into effect from July 1, 2022, while the gains will be taxed effective April 1.

Separately, the government is working on a legislation to regulate cryptocurrencies but no draft has yet been released publicly.

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