30% Cryptocurrency Tax Calculation: Failure to report losses is a significant restriction. Even more for a new asset class
By Anmol Gupta
“Your profit is our profit, your loss is your loss – GoI” Well, the government. he didn’t say so explicitly in the 2022 Budget, but this is what Indians have been circulating on the internet since 1st February. Thus, in the 2022 Budget, the government initiated the taxation of “virtual digital assets” which also include cryptocurrencies, following the official definition of this term. The cryptocurrency fraternity rejoiced at this time, assuming it was the indirect legalization of cryptocurrencies. But, looking into the finer details of the 2022 budget, which is the things that weren’t said during the FM speech, it’s easy to infer that while the government hasn’t put a blanket ban on cryptocurrencies, the government has certainly taken a step towards. containment of speculative trading in cryptocurrencies.
It is clear from the following statements cited in the Explanatory Circular of the provisions of the Finance Law 2022
2.2 Further, no offsetting of any losses resulting from the transfer of virtual digital assets is permitted against any income calculated under any other provision of the law and such loss cannot be carried over to subsequent valuation years.
3. Furthermore, in order to broaden the tax base of the operations thus carried out in relation to these assets, it is proposed to insert article 194S of the law to provide for the deduction of the tax on payment for the transfer of virtual digital assets to a resident in the rate of one per cent of that sum.
Let me help you understand all of this using an elaborate example:
> Let’s say you buy bitcoin worth Rs 1 Lakh out of 1st July 2022. Now, suppose the value of your bitcoins is worth Rs. 50K out of 1st August 2022. This means you have suffered a loss of 50,000 in one month.
> Now you decide to book this loss and withdraw money from bitcoins because you don’t expect it to recover soon and you want to reduce your losses.
> So, you book a loss of Rs. 50,000 and take the money. At this point, you won’t get 50,000 back. Instead, you will get Rs 49,500 back because 1% of TDS will be deducted. So, it doesn’t matter if you are making a profit or a loss, the TDS will be deducted at the time of repayment.
> Now invest these Rs 49,500 in Ethereum on 1st August 2022.
> Ethereum works well and is valued at Rs 80,000 on 1st March 2023. You decide to sell it off and account for the profit. So, you get Rs 79,200, because 1% TDS will be deducted.
Hence, the 1st March 2023, you no longer have holdings in cryptocurrencies.
During the financial year 2022-23, here’s what you did with your cryptocurrency investments:
- He made a loss of Rs 50,000 on bitcoin and got a TDS of Rs 500 deducted when booking the loss.
- He made a profit of Rs 30,500 on Ethereum and deducted a TDS of Rs 800 while booking that profit.
- In total, you made a loss of -50,000 + 30,500 = -19,500
- And he paid Rs 1300 (500 + 800) in taxes to the government. already.
But since you’ve experienced an overall loss on your cryptocurrency investments, you shouldn’t have to pay taxes. Then, during the presentation of the ITR for 2022-23, you will prove that you have booked a loss of Rs 19,500 and then the TDS of Rs 1300 must be refunded. The government will gracefully reimburse you.
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Now, the success of Ethereum has taken over your mind and you decide to try your luck with cryptocurrencies again next financial year.
- You buy Ethereum for a value of Rs 1 Lakh on 1st April 2023. On 1st March 2024, has a value of Rs 1.4 Lakh. You decide to sell it off and book the profit.
- As you might have guessed by now, you will receive Rs 138,600 in your account as Rs 1400 will be the TDS. Now, when you submit your ITR for 2023-24, you are likely to calculate your tax liability for cryptocurrency investments as follows:
> Profit of Rs. 40,000 minus Rs 19,500 of loss you booked last year. So, that’s Rs 20,500. You could say you have to pay 30% of Rs 20,500 which is ~ Rs 6150 in tax.
> But the government disagrees with this. The government says you cannot carry over losses for your virtual digital assets. Carrying forward is available for companies, mutual funds, stocks, etc., but not for virtual digital assets.
But, for the financial year 2023-24, the government wants you to pay 30% tax on Rs 40,000 which is Rs 12,000.
Since the TDS of INR 1,400 has already been deducted, it is necessary to pay INR 10,600 in addition to the government. I guess you may have understood by now why cryptocurrency taxation is being interpreted as “Your profit is our profit, your loss is your loss”.
The inability to report losses is a significant restriction. Even more so for a new asset class such as cryptocurrency which is currently very volatile in nature. government definitely wants to discourage trading in cryptocurrencies.
Not only this, the effect of 1% of TDS will be very large on trading volumes, as Nithin Kamath (founder of Zerodha) pointed out a few days ago. Simply put, he stated that since 1% of TDS will be deducted on every trade, for any active trader, 50% of the capital will be locked into TDS if he makes 50 trades in a financial year regardless of whether he makes a profit or a loss. And for any market to sustain itself, active traders are very important as they provide liquidity in the market.
But 1% of TDS will very significantly discourage active trading activity. It could simply kill the entire market. Furthermore, the government will not allow any other costs to be deducted as an expense from the profits except the acquisition cost which means the purchase price.
So, if you incur other expenses such as platform fees, brokerage fees, Internet, electricity, research, etc., you will not be allowed to claim these expenses as deductions. It should be noted that this type of expense can be claimed as a business related expense for stocks (when treated as a business) and derivatives trading.
Furthermore, any losses from trading cryptocurrencies cannot be offset against any other type of income. The loss from trading cryptocurrencies can be used to offset the gains from trading cryptocurrencies only. Overall, the government has neither legalized nor banned cryptocurrencies. But they certainly made a move to at least discourage short-term trading.
Cryptocurrency veterans are confident and are also looking positively at this step. They are pointing out that at least the dialogue has begun. Although the government has not kept taxation on cryptocurrencies on par with stocks or mutual funds, but at least it has imposed a tax and has not put a blanket ban. They hope to relax in the future. Well, let’s hope the crypto fraternity hopes come to life.
In my opinion, cryptocurrency trading should have been treated like stock trading and investing. Gains / losses from intraday trading and derivatives trading can be classified as business profits and losses and you pay taxes based on your tax bracket. While you are in cryptocurrency, regardless of which tax bracket you fall into, the tax rate will still be 30%.
Additionally, stocks and mutual funds also have applicable short-term capital gains and long-term capital gains. There is no such provision for crypto income. The introduction of the concept of capital gains could have encouraged investment in cryptocurrencies based on long-term fundamentals.
But then, encouraging cryptocurrency investments wasn’t the goal, was it?
(The author is founder, 7Prosper, personal financial planner and investment advisor.)
The cryptocurrency tips / recommendations in this story are from the respective commentator. Financial Express Online takes no responsibility for their advice. Consult your financial advisor before trading / investing in cryptocurrencies.