How would the tax on crypto assets impact the industry?

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The government has clarified that investors will not be allowed to offset the losses of one crypto asset against the gains of another, and that crypto-mining infrastructure costs will not be included in the cost of acquisition at claim a deduction. Mint examines the ramifications:

How are crypto investments taxed?

The February 2022-23 Union Budget proposed that gains from virtual digital assets or crypto assets be taxed at 30%, regardless of the individual’s income tax bracket. In addition, a 1% withholding tax or TDS has been introduced on the transfer of these assets. The government has not clarified whether crypto-assets should be treated as currencies, commodities or securities, and clarification is expected in due course through separate legislation. Gifting crypto assets to non-relatives is also taxed in the hands of the recipient if the value exceeds 50,000 in one year.

How is the crypto tax different from others?

If the listed shares are sold within 12 months of purchase, short-term capital gains tax (STCG) is applied on the capital gains, while beyond one year, long-term capital gains tax (LTCG) is levied. The STCG is levied at 15.6% including cess, while the LTCG for gains above 1 lakh equals 10.4% including fees. There is no supply of long or short term crypto assets, while winnings are taxed at a flat rate of 30%. Equity investors can offset the loss of one stock against another, while deferring short-term and long-term losses for eight valuation years. This was not allowed in crypto.

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Shares against crypto

How will the crypto tax impact investors?

During a tax year, if an investor has realized gains in bitcoin and losses in ether, he will have to pay a tax of 30% on the gains in bitcoin. Moreover, the absence of a loss compensation provision would result in a double whammy: paying taxes on the winnings and no compensation for the losses. Tax experts believe that in some cases the effective tax rate can even cross 100% on crypto investments.

How will minors be affected?

The government has clarified that mining infrastructure cannot be deducted as an acquisition cost either. Until now, some understood that crypto generated during the “mining” process is only taxable on profits, after taking into account mining expenses such as electricity. But with the latest explanation, a 30% tax plus tax and surcharges will be levied on these transactions. Experts believe that crypto mining operations would become unprofitable under the current announcement.

Will the crypto tax trigger an exodus of investors?

The crypto industry has unequivocally criticized the tax proposals. Thanks to the heartbreaking rally in crypto assets over the past two years, some estimate that more than 20 million Indian investors have poured in more than 1 trillion in cryptos. However, industry leaders are concerned that the lack of provisions to offset losses will push users away from KYC-compliant exchanges and platforms into the underground peer-to-peer gray market, which would go to the defeats the purpose of regulation.

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