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For the entire digital asset market and the Web 3.0 market, this year's budget speech's legal mandate to include digital assets in taxation was a welcome and motivating move.
The flat tax rate of 30% on gains from trading virtual digital assets (VDA) announced by the Finance Minister at the time was a source of some concern but not a deterrent to trading or investing. The government has now stepped in to give cryptocurrencies/VDAs some recognition as an asset class for tax purposes, even though the sector is still largely unregulated.
It also said that, in response to one of the Parliamentarians' questions on the subject, the Government said that "loss from the transfer of VDAs will not be able to be set-off against income from the transfer of another VDA."
VDAs, such as crypto coins or non-fungible tokens (NFT), will be treated as separate assets in an investor's portfolio. The gain or loss from the transfer of one VDA can't be set off against the loss or gain, respectively, from the transfer of another VDA.
In simple terms, if an investor trades in Coin A and Coin B, the gains from Coin A in a given year can only be reduced or adjusted against the losses from Coin A. (not Coin B).
As an example, let's say that X invested Rs 1,000 in Coin A and Rs 1,000 in Coin B, but we don't know for sure.
He sold the VDAs (Coin A and Coin B). The profit was $500 and the loss was $600. The rest of the money was left over, as shown in the figure.
Coin A: Rs 1,000 + Rs 500 (gains) = Rs 1,500
Coin B: Rs. 1,000 – (Rs 600) = Rs 400
Remaining Capital = Rs 1,900
In general, X lost Rs 100, but the government says that because each VDA must be treated separately when calculating gains and losses, X will have to pay tax on the capital gains he made from trading Coin A. he will have to pay Rs 150 in tax (30 percent of the Rs 500).
Including VDA in the tax code was a positive move for the industry and the market. However, this recent clarification on not allowing the setting off of losses against the income that comes from selling another VDA is a concern and is likely to slow down the flow of retail investment and the participation of investors in this asset class.
Mining costs will not be able to be used as expenses.
In addition, if someone were to mine the VDA, which would require a lot of money, the government says that these costs can't be recouped with the money they make because it's a long-term deal. However, depreciation may be able to be claimed against the capital investment in IT systems that were bought for mining VDAs.
In light of this clarification from the government, it is very likely that both crypto exchanges and investors will have to make relevant disclosures, and there will likely be a KYC process as well as transactions in fiat currency linked with PAN and Aadhaar.
VDA transactions can be found by putting in place rules and regulations that require market participants to make and share relevant disclosures with the government. There are a few leaks in the collection of data, but these leaks also happen when dealing with fiat money.
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