The crypto industry has taken a strong exception to the government's clarification on taxation of cryptocurrencies (called as virtual digital assets, VDA). The clarification came in response to Karti Chidambaram's question in the Lok Sabha on Monday. "As per the proposed provisions of section 115BBH, infrastructure costs incurred in 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 deduction as per the provisions of the Act," said Pankaj Chaudhary, minister of state in the Ministry of Finance. Further, the minister added that the loss from the transfer of virtual digital assets will not be allowed to be set off against the income arising from transfer of another virtual digital asset. The industry seems to be disheartened as it believes such measures would discourage investor participation in the emerging asset class.

It's a continued effort, as per Rohinton Sidhwa, Partner, Deloitte India, to isolate and disincentivise crypto currency related activities in India. "The mining expense disallowance is unlikely to impact the majority of traders, however the prevention of offset between different cryptos will probably negatively impact many traders."

Nischal Shetty, CEO of WazirX, the country’s largest cryptocurrency exchange, urges the government to reconsider this provision. He says, "It's very unfortunate. Treating profits and losses of each market pair separately will discourage crypto participation and throttle the industry's growth."

While the industry believes that the move will be detrimental for the crypto industry and the millions who have invested in this emerging asset class, Ashish Singhal, co-founder and CEO, CoinSwitch Kuber doubts that the lack of provision to offset losses will drive away users from KYC-compliant exchanges and platforms to the underground peer-to-peer grey market. "It would defeat the purpose of the tax completely," he adds.

Earlier in February this year, the Finance Minister, Nirmala Sitharaman, during Budget for FY2023, had proposed to insert section 115BBH to the Income-tax Act,1961 to provide for taxation of income from transfer of virtual digital assets (VDA). As per the proposed section, any income from transfer of VDA shall be taxed at the rate of 30%. Later, Amitabh Kant, CEO, NITI Aayog, gave more clarity and said the government is not banning cryptos. "Once you start taxing, it means you will have a regulatory mechanism, whether some aspect is regulated by RBI or SEBI. The Budget provides absolute clarity. Government has not banned cryptos. It has, in fact, treated crypto as an asset class, defined as a virtual digital asset," he told Fortune India in an earlier interview.

The Budget recognised VDAs as an emerging asset class. Therefore, a natural course of action, according to Ashish Singhal of CoinSwitch, would have been to progressively bring the regulations on par with other asset classes. Instead, today, he says, "we have taken a step backwards. If a regressive provision such as this would have been applicable in equities, it would have discouraged retail investors from participating."

In the meanwhile, most cryptocurrencies traded lower. Bitcoin, the biggest cryptocurrency, was recently trading around $41,200, down nearly 12% over the past 24 hours. Ethereum, the second largest crypto by market cap, was trading near $2,800, a nearly 1.5% drop over the same period.

Follow us on Facebook, X, YouTube, Instagram and WhatsApp to never miss an update from Fortune India. To buy a copy, visit Amazon.