Booked loss in Bitcoin, profit in ETH but confused about 30% crypto tax calculation? Here’s how it will work

By Anmol Gupta

“Your win is our win, your loss is your loss – GoI” Well, the government. didn't say this explicitly in Budget 2022, but this is what Indians have been circulating on the internet since 1^St. February. So, in Budget 2022, the government clarified the taxation of "virtual digital assets" which also includes cryptocurrency, according to the official definition of this term. The crypto fraternity rejoiced at this moment, assuming that this is the indirect legalization of cryptocurrencies. But, looking at the finer details of the 2022 budget, i.e. the things that were not said during the FM speech, it is easy to deduce that although the government has not banned cryptocurrencies, but the government has surely taken action. step towards reducing speculative trading in cryptocurrencies.

It is evident from the following statements mentioned in the Memorandum explaining the provisions of the Finance Bill 2022

2.2 In addition, any loss arising from the transfer of virtual digital assets shall not be permitted to be offset against any income calculated under any other provision of the Act, and such loss shall not be permitted to be carried over to subsequent assessment years.

3. In addition, in order to expand the tax base of the transactions thus carried out in relation to these assets, it is proposed to insert section 194S of the Law to provide for the deduction of the tax on the payment of the transfer of virtual digital assets to a resident in the rate of one percent of said sum.

Let me help you understand all this using an elaborate example:

> Say you buy bitcoins worth Rs 1 Lakh in 1^St. July 2022. Now, suppose the value of your bitcoins is worth Rs. 50K in 1^St. August 2022. This means you incurred a 50K loss 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 cut your losses.

> So, reserve a loss of Rs. 50,000 and withdraw the money. At this time, you will not get 50,000 back. Instead, you will get Rs 49,500 because 1% TDS will be deducted. So no matter if you make a profit or a loss, the TDS will be deducted at the time of redemption.

> Now invest this 49,500 rupees in Ethereum on 1^St. August 2022.

> Ethereum works fine and is valued at Rs 80,000 on 1^St. March 2023. You decide to sell it and post the profit. So you get Rs 79,200, because 1% TDS will be deducted.

So the 1^St. March 2023, you no longer have crypto holdings.

During fiscal year 2022-23, this is what he has done with his cryptocurrency investments:

1. He had a loss of Rs 50,000 in bitcoin and a TDS of Rs 500 was deducted when accounting for that loss.
2. He made a profit of Rs 30,500 on Ethereum and a TDS of Rs 800 was deducted when booking that profit.
3. In total, you had a loss of -50,000 + 30,500 = -19,500
4. And he paid 1300 rupees (500+800) in taxes to the government. already.

But since you had an overall loss on your cryptocurrency investments, you are not supposed to pay taxes. So by filing the ITR for 2022-23, you will prove that you recorded a loss of Rs 19,500 and therefore you should be reimbursed the TDS of Rs 1300. The government will reimburse you gracefully.

READ ALSO | Should small crypto investors move their money into mutual funds and stocks? experts speak

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

Then,

1. You buy Ethereum worth Rs 1 Lakh in 1^St. April 2023. The 1^St. March 2024, it is valued at Rs 1.4 Lakh. You decide to sell it and book the profit.
2. As you may have already guessed, you will receive Rs 138,600 in your account as Rs 1400 will be the TDS. Now, when you file your ITR for 2023-24, you will likely calculate your tax liability for cryptocurrency investments as follows:

> Profit of Rs. 40,000 minus Rs 19,500 loss that he recorded last year. So, that's Rs 20,500. You could say that you have to pay 30% of Rs 20,500, which is ~Rs 6,150 in taxes.

> But, the Government does not agree with this. The government says it can't pass on losses from its virtual digital assets. Loss carry is available for companies, mutual funds, stocks, etc., but not for virtual digital assets.

But for the fiscal year 2023-24, the government wants you to pay 30% tax on Rs 40,000, which is Rs 12,000.

Since a TDS of INR 1,400 has already been deducted, you need to pay an additional INR 10,600 to the government. I guess by now, you may have figured out why crypto taxes are interpreted as "Your gain is our gain, your loss is your loss."

The inability to carry losses is a significant constraint. Even more so for a new asset class like cryptocurrency, which is very volatile in nature right now. Government surely wants to discourage crypto trading.

Not only this, the effect of 1% TDS is going to be very big on trading volumes, as Nithin Kamath (Founder of Zerodha) pointed out a few days ago. In a nutshell, he said that since 1% TDS will be deducted on every trade, for any active trader, 50% of capital will be locked in TDS if you make 50 trades in a financial year, regardless of whether or not you trade. profit or a loss. And for any market to sustain, active traders are very important as they provide liquidity in the market.

But the 1% TDS is going to discourage active trading activity very significantly. It could wipe out the entire market. In addition, the government will not allow any other cost to be deducted as an expense from earnings except acquisition cost, which means the purchase price.

Therefore, if you incur any other expenses such as platform fee, broker fee, Internet, electricity, research, etc., you will not be able to claim these expenses as deductions. It should be noted that these types of expenses can be claimed as expenses related to stock trading (when treated as a business) and derivatives trading.

Also, any loss arising from cryptocurrency trading cannot be offset by any other type of income. Losses derived from cryptocurrency trading can be used to offset profits derived solely from cryptocurrency trading. In general, the government has neither legalized nor banned cryptocurrencies. But surely they have made a move to at least discourage short-term trading.

Future:

Crypto veterans are hopeful and see this step positively as well. They are signaling that at least the dialogue has begun. Although the government has not kept taxes on cryptocurrencies on a par with stocks or mutual funds, they have at least imposed a tax and not imposed a blanket ban. They hope to relax in the future. Well, let's hope the hopes of the crypto fraternity come true.

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 trading income and losses and you pay taxes according to your tax table. As long as you are in crypto, no matter what tax slab you are on, 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 crypto based on long-term fundamentals.

But then, encouraging investments in cryptocurrencies was not the goal, was it?

(The author is founder, 7Prosper, personal financial planner and investment advisor.)

The suggestions/recommendations about cryptocurrencies in this story are from the respective commenter. Financial Express Online assumes no responsibility for its advice. Consult your financial advisor before trading/investing in cryptocurrencies.