FinMin refuses to allow crypto mining costs for deduction under the I-T Act

FinMin refuses to allow crypto mining costs for deduction under the I-T Act

 

The Union Minister of State for Finance, Pankaj Chaudhary has clarified that no deduction for any expenditure (other than the cost of acquisition) or allowance is allowed when calculating the revenue from the transfer of VDA. The Minister reiterated on Monday that infrastructure costs incurred in the mining of cryptocurrencies or any virtual digital assets will not be allowed as a deduction under the Income Tax Act.

Chaudhary said in a written reply to the Lok Sabha that the government will develop a definition of "Virtual Digital Assets" (VDA) with the goal of imposing a 30% tax on income derived from the transfer of such assets. Also, according to Chaudhary, the loss from the transfer of a VDA would not be offset against the income from the transfer of another VDA. He further stated that cryptocurrencies are currently uncontrolled in India.

The levy of income tax on crypto assets has been clarified in the Budget for 2022–23. In the same way as winners from horse races or other speculative transactions are subject to a 30% Income Tax plus cess and surcharges. Tax on such transactions will be subject to a 30% plus cess and surcharges from April 1, 2022.

"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.

Since intra-head adjustment of losses, i.e., set-off of losses arising from one VDA with income from another VDA, would be prohibited, such losses would be a sunk cost for investors, resulting in a double whammy of paying taxes on gains and no offset of losses, according to Nangia Andersen LLP Partner Sandeep Jhunjhunwala.

"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.

The disallowance of infrastructure expenditures spent in mining cryptocurrencies as allowable revenue expenditure will drive up the cost of mining these assets even more, according to Jhunjhunwala. The mining expense disallowance, according to Rohinton Sidhwa, Partner, Deloitte India, is unlikely to affect the bulk of merchants. The prohibition of offset between different cryptos, on the other hand, will almost certainly have a detrimental impact on many traders.

A 1% TDS on virtual currency transfers exceeding Rs 10,000 per year was also proposed in the Budget 2022–23, as well as taxes of such presents in the hands of the recipient. For designated persons, such as individuals/HUFs who are required to have their accounts audited under the I-T Act, the TDS threshold limit would be Rs 50,000 per year.

The 1 percent TDS rules will be effective from July 1, 2022, and the gains will be taxed on April 1, 2022. Separately, the government is drafting legislation to regulate cryptocurrencies, but no draft has been made available to the public.