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Explained: How will crypto taxation work in India?

Any loss arising from crypto trading cannot be offset against any other kind of income

March 11, 2022 / 08:02 AM IST

Your profit is our profit, your loss is your loss - GoI 

Well, the government didn’t explicitly say this in Budget 2022, but this is what Indians have been circulating across the internet since February 1.

In Budget 2022, the government cleared the air on taxation of “virtual digital assets” including cryptocurrency. The crypto fraternity rejoiced at this development, assuming it to be an indirect legalisation of cryptocurrencies. But the following excerpts from the Finance Bill, 2022, tell a different story.

2.2 Further, no set-off of any loss arising from the transfer of virtual digital assets shall be allowed against any income computed under any other provision of the Act, and such loss shall not be allowed to be carried forward to subsequent assessment years.

Further, in order to widen the tax base from the transactions so carried out in relation to these assets, it is proposed to insert section 194S to the Act to provide for deduction of tax on payment for the transfer of virtual digital assets to a resident at the rate of one percent of such sum.

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The government hasn’t imposed a blanket ban, but it has surely taken a step towards curbing speculative trading in cryptocurrencies.

Let’s understand this using an example:

> You buy bitcoin worth Rs 1 lakh on July 1, 2022. The value of your bitcoin drops to Rs 50,000 on August 1.

>  You withdraw from bitcoin on August 1, booking a loss of Rs 50,000, because you don’t expect it to recover soon and you want to cut your losses.

> Instead of Rs 50,000, you will get back Rs 49,500 after 1 percent tax is deducted at source. It doesn’t matter whether you make a profit or loss – TDS will be deducted at the time of redemption.

> You now invest this Rs 49,500 in Ethereum on August 1.

> Ethereum does well and it’s valued at Rs 80,000 on March 1, 2023. You sell and book profit. Again, you get back Rs 79,200, because of TDS.

So, as of March 1, you don’t have any crypto holdings.

In FY23, here is what you have done with your crypto investments:

i. Booked a loss of Rs 50,000 on bitcoins and paid Rs 500 as TDS.
ii. Made a profit of Rs 30,500 on Ethereum and paid Rs 800 as TDS.
iii. In total, you made a loss of Rs 19,500 (-50,000 + 30,500)

iv. And you paid Rs 1,300 (500 + 800) in taxes through TDS.

Since you made an overall loss in your crypto investments, you aren’t supposed to pay tax. While filing tax returns for 2022-23, you will show that you booked a loss of Rs 19,500 and hence, TDS of Rs 1,300 will be refunded to you.

Now, the success of Ethereum has taken over your mind and you decide to try your luck again on cryptocurrencies in the next financial year.

1. You buy Ethereum worth Rs 1 lakh on April 1, 2023. On March 1, 2024, it’s valued at Rs 1.4 lakh. You decide to sell it and book the profit.

2. As you would have guessed already, you will receive Rs 1,38,600 in your account after TDS of Rs 1,400. Now, when you file your ITR for 2023-24, you need to calculate your tax liability for crypto investments.

3. Profit of Rs 40,000 minus loss of Rs 19,500 booked last year, which is Rs. 20,500. You estimate paying 30 percent of Rs 20,500, or Rs 6,150, in taxes.

4. However, the government doesn’t agree and says losses from virtual digital asset transactions can’t be carried forward. The benefit is available for businesses, mutual funds and stocks but not for virtual digital assets.

For FY24, you must pay 30 percent tax on Rs 40,000, which is Rs 12,000. Since Rs 1,400 was already deducted, you need to pay Rs 10,600.

This is why crypto taxation is being interpreted as “Your profit is our profit, your loss is your loss.”

A few days ago, Nithin Kamath, founder of Zerodha, pointed out that since 1 percent TDS will be deducted on each transaction, for any active trader, 50 percent of the capital will get blocked in TDS for 50 trades in a financial year, irrespective of profit or loss. For any market to sustain itself, active traders are very important as they provide it with liquidity.

Further, the government won’t allow other costs like platform fees, broker fees and internet charges to be deducted as expenses from the profit, except the cost of acquisition, which is the purchase price. This is allowed in stocks and derivatives trading.

Also, a loss from crypto trading cannot be offset against any other income. Overall, the government has neither legalised nor banned cryptocurrencies. But it’s made a move to discourage short-term trading, at least.
Anmol Gupta is a Founder of 7Prosper Financial Planners
first published: Mar 11, 2022 08:02 am
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