How will the 30% crypto tax calculation work for investors in fiscal year 2022-23? A picture
Calculation of the 30% tax on cryptocurrencies: the inability to carry forward losses is an important restriction. More for a new asset class
By Anmol Gupta
“Your profit is our profit, your loss is your loss – GoI” Well, the government. didn’t say this 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 clarified the taxation of “virtual digital assets” which also includes cryptocurrency, according to the official definition of this term. The crypto fraternity is rejoicing right now, assuming 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 put a blanket ban on crypto, but surely the government has taken a step towards curbing speculative cryptocurrency trading.
It is apparent from the following statements mentioned in the memorandum explaining the provisions of the Finance Bill 2022
2.2 Further, no set-off for any loss resulting from the transfer of Virtual Digital Assets will be allowed against any income computed under any other provision of the Act, and such loss may not be carried forward to subsequent taxation years.
3. In addition, in order to broaden the tax base of transactions thus carried out in relation to these assets, it is proposed to insert section 194S of the law providing for the deduction of tax on the payment of the transfer of digital assets to a resident at the rate of one percent of this sum.
Let me help you understand all of this with an elaborate example:
> Say you buy bitcoins worth Rs 1 Lakh in 1st July 2022. Now suppose the value of your bitcoins is worth Rs. 50K on 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 anytime soon and want to cut your losses.
> So you reserve a loss of Rs. 50,000 and withdraw the money. At this point, you will not get 50,000 back. Instead, you will get Rs 49,500 back as 1% TDS will be deducted. So it doesn’t matter whether you make a profit or a loss, the TDS will be deducted at the time of redemption.
> You now invest these Rs 49,500 in Ethereum on the 1st August 2022.
> Ethereum is doing well and it is valued at Rs 80,000 on 1st March 2023. You decide to sell it and record the profit. Thus, you get back Rs 79,200, as a TDS of 1% will be deducted.
So the 1st March 2023, you no longer have any cryptocurrency holdings.
In fiscal year 2022-23, here’s what you did with your crypto investments:
- Made a loss of Rs 50,000 on bitcoin and got a TDS of Rs 500 deducted when booking that loss.
- Made a profit of Rs 30,500 on Ethereum and got a TDS of Rs 800 deducted when booking that profit.
- In total, you have made a loss of -50,000 + 30,500 = -19,500
- And paid Rs 1300 (500+800) in taxes to the government. already.
But since you made an overall loss in your crypto investments, you are not supposed to pay any tax. So, when filing the ITR for 2022-23, you will show that you have booked a loss of Rs 19,500 and therefore the TDS of Rs 1300 should be refunded to you. The government will reimburse you graciously.
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Now, the success of Ethereum has invaded your mind and you decide to try your luck again on crypto-currencies the following exercise.
- You are buying Ethereum worth Rs 1 Lakh in 1st April 2023. The 1st March 2024, it is valued at Rs 1.4 Lakh. You decide to sell it and reserve the profit.
- As you would have guessed by now, 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 are likely to calculate your tax liability for crypto investments as follows:
> Profit of Rs. 40,000 minus the loss of Rs 19,500 you booked last year. So, it’s Rs 20,500. You could say you have to pay 30% of Rs 20,500, which is ~Rs 6150 in taxes.
> But the government does not agree with this. The government says you cannot carry forward losses to your virtual digital assets. Loss carry 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 a tax of 30% on Rs 40,000, or Rs 12,000.
Since the TDS of INR 1,400 has already been deducted, you have to pay INR 10,600 more to the government. I guess by now you may have understood why crypto taxation is interpreted as “Your profit is our profit, your loss is your loss”.
The inability to carry forward losses is a significant restriction. More so for a new asset class like cryptocurrency, which is very volatile in nature right now. Govt. surely wants to discourage crypto trading.
Not only that, the effect of 1% TDS is going to be very huge on trading volumes as Nithin Kamath (Zerodha Founder) pointed out a few days ago. In a nutshell, he said that since 1% TDS will be deducted on each trade, for any active trader, 50% of capital will be locked into TDS if he makes 50 trades in a fiscal year, whether he makes or not a profit or loss. And for a market to hold, active traders are very important as they provide liquidity to the market.
But 1% TDS will very significantly discourage active trading activity. It could well kill the whole market. In addition, the government will not allow any other costs to be deducted from profits except for the cost of acquisition, i.e. 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 those expenses as deductions. It should be noted that these types of expenses can be claimed as business-related expenses for stocks (when treated as a business) and derivatives trading.
Moreover, any loss resulting from crypto trading cannot be offset by any other type of income. Losses from crypto trading can be used to offset gains from crypto trading alone. Overall, the government has neither legalized nor banned cryptocurrencies. But surely they have taken steps to at least discourage short-term trading.
To come up:
Crypto veterans are hopeful and also view this step positively. They point out that at least the dialogue has begun. Although the government did not keep taxation on crypto at the same level as stocks or mutual funds, but at least they imposed a tax and did not impose a blanket ban. They hope for relaxation in the future. Well, let’s hope the hopes of the crypto fraternity come to life.
In my opinion, crypto trading should have been treated like stock trading and investing. Profits/losses from intraday trading and derivatives trading can be classified as business income and loss and you pay taxes according to your tax plate. In crypto, regardless of the tax bracket you fall under, the tax rate will always 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 long-term fundamental-based investments in cryptos.
But then, encouraging crypto investments wasn’t the goal, was it?
(The author is the founder of 7Prosper, Personal Financial Planner & Investment Advisor.)
Suggestions/recommendations regarding cryptocurrencies in this story are from the respective commenter. Financial Express Online takes no responsibility for their advice. Please consult your financial advisor before trading/investing in cryptocurrencies.