Taxation on Cryptocurrencies – Anyway to reduce loss?

The Lok Sabha passed the Finance bill on 25^th March,22. Resultantly gains in cryptocurrencies will be taxed at 30% as per section 115BBH of the Finance Bill. Be it Bitcoin and other coins to NFT and related earnings, all the virtual digital assets shall be taxed.

According to this new provision, loss from the transfer of virtual digital assets will be taxed in a particular manner. 

• The loss arising from transfer of virtual digital assets will not be allowed to be set off against the income arising from transfer of another virtual asset. Similarly, this loss cannot be adjusted against any other income. 
• 1% TDS will be held back each time there is sell of a crypto asset irrespective of whether there is a profit or loss.  It will be set-off against the crypto tax at the end of the year. Effectively each transaction blocks 1% and an active trader will get 50% of his capital blocked if he/she carries out 50 transactions during a year. 
• The infrastructure cost will not be treated as cost of acquisition and the same will not be allowed as deduction under the Act. This includes broker fees, platform fees and internet charges. The same is allowed in stocks and derivatives.

‘A single tax for single crypto’ rule is seen as a major setback for the crypto industry in India. Suppose an investor buys Bitcoin in May and sells them at a loss in June. He/she again buys Bitcoin in August and sells them at a profit. Now both the transactions fall within the same year, yet the loss cannot be adjusted against the profits amount considering the above rules. The industry growth shall be hindered by non-settlement of losses against profits despite they fall under the same category of transactions. 

Apparently carrying forward of losses is not permissible, at the same time the question remains-‘Is setting off losses against gains from crypto possible within the same financial year? In that case if an individual earned a profit of Rs. 100 from a crypto transaction and in the same financial year, the individual suffered a loss of Rs. 70. Tax rate is applicable at 30%. His/her net profit shall be Rs. 30 and tax liability shall be calculated as under. 

Profit Rs. 100-Loss Rs.70, net gain Rs. 30. Tax on Rs. 30 @ 30% shall be Rs. 9. 

There is yet another ambiguity prevailing. If you incur a loss by trading in one crypto asset and make a profit by selling another one, whether you can set off the gains and losses against each other? Let’s say profits on Bitcoin and losses on Doge coin. Are they adjustable? The interpretation by a few experts affirms that ‘no set off against income computed under any other provision of this Act’ clearly allows setting off losses against gains under this section irrespective of type of the asset. More clarity is awaited on this kind of adjustments as a few others think that there no specific provision enabling the adjusting of losses against gains and hence it is not permissible even during the same financial year in case of holding different crypto currencies. 

The applicable tax rate is also on a higher side. The Crypto industry is not happy with the highest tax rate of 30%. It is on par with taxation of winnings from lottery. Those who are covered by the lower tax rates shall have to pay a little less by way of tax but an increase of 5% in tax will be borne by companies trading in cryptocurrency.

Now let’s consider the TDS angle, suppose Rs. 5000 are invested by an individual on 1^st April,2022 in Bitcoin. The Bitcoins are sold two months later at a loss of Rs.2000. The individual will receive is Rs. 2970.(Rs. 3000-Rs.30), after deducting tax at source @ 1%.  And irrespective of the same being sold at a profit or loss, TDS shall be cut. 

Suppose a buyer invests Rs. 10,000 in Ethereum on 10^th December. He sells the same at Rs. 45,000 on Feb 1^st. Again, TDS is applicable on the amount received and he gets is Rs. 44, 550. However, the amount of TDS paid shall be deducted from the tax payable on the transaction. 

Profit= Rs.35000(Rs.45,000-Rs.10,000)

Tax payable @ 30%=Rs. 10,500-Rs.450 (already paid as TDS)=Rs.10,050.

As the losses are not allowed to be carried forward, a buyer needs to balance the selling pattern in such a way that minimizes tax liability. Day-traders who are not covered by any tax brackets too shall be liable for paying tax under the new rules. 

The future of crypto is not very bright looking at the current scenario. Already the mining is done at a very small scale in India and the new taxation framework will kill the mining prospects.

The legality aspects are still not clear in India. One needs to think before investing money in cryptocurrencies. There could be better ways to invest money rather than to end up paying more tax by investing in crypto without even knowing how the law will treat it in future. The classification of crypto as a ‘currency’ or an ‘asset’ itself lacks legal backing.

The treatment of the gains on the crypto transactions again depends upon them being taxable as business income of capital gains depending on the investor’s intention and nature of these transactions. If classified as ‘investments’, they will be considered capital gains or losses and the capital gains tax rules shall be applicable to them. But when reported as business income, then GST also comes into play. The transaction can also fall under the category ‘income from other sources’ and taxed accordingly. 

The current taxation may eventually change to match the global expectations. The mechanism is framed in a way that discourages crypto transactions without banning them. One needs to be very mindful while investing in crypto as a lot of confusion exists when it comes to their tax treatment.

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Krishna Rath is a SEBI Registered Investment Adviser, and since 2015 has been educating netizens on investments and insurance. Krishna is a fee only SEBI RIA and is Odisha's first SEBI RIA. With background in IT, Krishna is changing the advisory space with new innovations in AdvisoryTech.

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