Crypto mining costs: No I-T deduction to be allowed, says govt

Clarifying taxation aspects for cryptocurrencies or virtual digital assets, the government said Monday that infrastructure costs incurred in the mining of cryptocurrencies or any virtual digital assets will not be allowed as deduction under the Income-tax Act.

Also, loss from the transfer of virtual digital asset (VDA) will not be allowed to be set off against the income arising from the transfer of another VDA, Minister of State for Finance Pankaj Chaudhary said in a written reply to the Lok Sabha.

The government will come out with a definition of VDAs with a view to levy 30 per cent tax on income from the transfer of such assets, he said, adding that currently cryptocurrencies are unregulated in the country.

The FY23 Budget has brought in clarity concerning the levy of income tax on crypto assets. From April 1, a 30 per cent income tax plus cess and surcharges, will be levied on such transactions.

“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,” Chaudhary said.

He added “infrastructure costs incurred in the mining of VDA (e.g. 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.

Sandeep Jhunjhunwala, partner, Nangia Andersen LLP, said the clarifications provided by the government lays to rest some of the doubts that stakeholders of the crypto ecosystem had been grappling with and more might be required for withholding tax provisions on crypto transactions.

“Since intra-head adjustment of losses, i.e., 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. Similar analogy could be drawn for set-off of losses within the same class of VDA, say ethereum vs dogecoin. Disallowance of infrastructure cost incurred in mining cryptocurrencies costs, as a permissible revenue expenditure, would further increase the cost of mining these assets,” he said.

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

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