The legal mandate to tax digital assets in this year’s budget speech was indeed a welcome and motivating move for the entire digital asset industry and the Web 3.0 market.
While a flat 30% tax rate on profits from trading virtual digital assets (VDAs), announced by the Secretary of the Treasury, appeared to be a matter of concern at the time (but did not have a deterrent effect on trading and investment). ), the government has taken steps to recognize crypto/VDA as an asset class for tax purposes, though the sector remains largely unregulated otherwise.
Furthermore, on March 21, while answering questions on the subject from one of the parliamentarians, the government clarified that “under the provisions of proposed Section 115BBH of the Income Tax Act of 1961, the loss on the sale of a VDA cannot be evaluated with the proceeds of compensation from the sale of another VDA”.
Essentially, this implies that each VDA in an investor’s portfolio, i.e. cryptocurrencies or non-fungible tokens (NFTs) is treated as a separate asset class and the gain or loss associated with the routing of a particular VDA is not may be offset/adjusted for loss or gain in another VDA.
In a nutshell, if an investor trades both Currency A and Currency B, Currency A’s profits in a given year can only be reduced/adjusted against losses incurred from trading Currency A (and not Annex B).
As an example, suppose (hypothetically) that X invested Rs 1,000 in currency A and Rs 1,000 in currency B.
When X sold the ADVs (both Coin A and Coin B), Coin A’s profit was Rs 500, Coin B’s loss was Rs 600, and the remaining equity was as follows:
Schedule A: Rs 1,000 + Rs 500 (receipts) = Rs 1,500
Schedule B: Rs 1,000 – (Rs 600) = Rs 400
Remaining capital = Rs 1,900
Although X has suffered a total loss of Rs 100 according to the Government’s clarification, as each VDA must be treated separately for the purpose of calculating gains/losses, X will have to pay capital gains tax resulting from the hearing. from Schedule A. That means you have to pay Rs 150 as tax (30% of Rs 500).
While the Government’s position on the inclusion of the VDA within the scope of the tax incidence has been positive and reassuring for the industry and market participants, this recent clarification on the refusal to compensate losses with income from the transfer of another VDA is worrying and will probably attract private investment. and investor ownership in this asset class.
Mining costs are not recognized as expenses
Furthermore, the government has clarified that such costs cannot be offset against revenue when engaged in VDA mining, which requires significant investment as it is a capital investment. However, it may be permissible to claim a write-off of the capital investment in computer systems acquired for the purpose of extracting VDA.
Given this government clarification, the onus to provide relevant disclosures is likely to fall on both crypto exchanges and investors, and a KYC process is likely to be required on fiat currency transactions believed to be made with PAN and Adhar to keep in touch.
In addition to some leaks in data collection (which also exist when it comes to fiat currencies), the detection of transactions in the VDA can be done by introducing relevant rules and regulations that force market participants to generate and share relevant information with the government.