How will 30% crypto tax calculation work for investors in FY 2022-23? An illustration

By Anmol Gupta

“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 ever since 1^st February. So, in Budget 2022, the government cleared the air on taxation of “virtual digital assets” that includes cryptocurrency too, going by the official definition of this term. The crypto fraternity rejoiced at this moment, assuming it to be the indirect legalization of cryptocurrencies. But, looking into the finer details of budget 2022, i.e., the things that were not said during the speech of the FM, it’s easy to deduce that although the government hasn’t put a blanket ban on crypto, but government has surely taken a step towards curbing speculative trading in cryptocurrencies.

It’s evident from the following statements mentioned in the Memorandum explaining the provisions in the Finance Bill, 2022

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.

3. 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.

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

> Let’s say you buy bitcoins worth Rs 1 Lakh on 1^st July 2022. Now, assume that the value of your bitcoins is worth Rs. 50K on 1^st August 2022. This means that you’ve incurred a loss of 50K in a month.

> Now you decide to book this loss and take out money from bitcoins because you aren’t expecting it to recover anytime soon, and you want to cut your losses.

> So, you book a loss of Rs. 50,000 and take the money out. At this point in time, you will not get 50,000 back. Instead, you will get back Rs 49,500 because 1% TDS will be deducted. So, it doesn’t matter whether you are making a profit or loss, TDS will be deducted at the time of redemption.

> You now invest this Rs 49,500 in Ethereum on 1^st August 2022.

> Ethereum does well and it’s valued at Rs 80,000 on 1^st March 2023. You decide to sell it off and book the profit. So, you get back Rs 79,200, because TDS of 1% will be deducted.

So, on 1^st March 2023, you don’t have any holdings in cryptocurrencies anymore.

During the financial year 2022-23, here is what you have done with your crypto investments:

1. Made a loss of Rs 50,000 on bitcoin and got a TDS of Rs 500 deducted while booking that loss.
2. Made a profit of Rs 30,500 on Ethereum and got TDS of Rs 800 deducted while booking that profit.
3. In total, you made a loss of -50,000 + 30,500 = -19,500
4. And paid Rs 1300 (500+800) in taxes to the govt. already.

But since you made an overall loss in your crypto investments, you aren’t supposed to pay tax. So, while filing the ITR for 2022-23, you will show that you booked a loss of Rs 19,500 and hence, the TDS of Rs 1300 must be refunded to you. The government will refund that to you gracefully. 

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

So,

1. You buy Ethereum worth Rs 1 Lakh on 1^st April 2023. On 1^st March 2024, it’s valued at Rs 1.4 Lakh. You decide to sell it off and book the profit.
2. 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 Rs 19,500 loss that you booked last year. So, that is Rs 20,500. You might say that you need to pay 30% of Rs 20,500 which is ~Rs 6150 in taxes.

> But, the Government doesn’t agree with this. Government says that you can not carry forward the losses for your virtual digital assets. Carrying forward of losses is available for businesses, mutual funds, stocks, etc but not virtual digital assets.

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

Since TDS of  INR 1,400 was already deducted, you need to pay INR 10,600 additionally to the govt. I guess by now, you might have figured out why crypto taxation is being interpreted as “Your profit is our profit, your loss is your loss”.

Inability to carry forward losses is a significant restriction. More so for a new asset class like cryptocurrency which is very volatile in nature at the moment. Govt. surely wants to discourage trading in crypto. 

Not just this, the effect of 1% TDS is going to be very huge on trading volumes as Nithin Kamath (Founder of Zerodha) had pointed out a few days back. In a nutshell, he said that since 1% TDS will be deducted on each transaction, for any active trader, 50% of the capital will get blocked in TDS if he/she makes 50 trades in a financial year irrespective of whether she 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% TDS is going to discourage active trading activity very significantly. It might just kill the entire market. Further, government won’t allow any other cost to be deducted as an expense from the profits except the cost of acquisition which means the purchase price.

So, if you incur any other expenses like platform fee, broker fee, internet, electricity, research, etc., you will not be allowed to claim these expenses as deductions. One must note that these kinds of expenses can be claimed as business-related expenses for stocks (when it’s treated as a business) and derivates trading.

Also, any loss arising from crypto trading cannot be offset against any other kind of income. Loss arising from crypto trading can be used to offset gains arising only from crypto trading. Overall, government has neither legalized nor banned cryptocurrencies. But they’ve surely made a move to discourage short-term trading at least.

Future:

Crypto veterans are hopeful and looking at this step also positively. They are pointing out that at least the dialogue has started. Although government hasn’t kept taxation on crypto at par with stocks or mutual funds, but at least they have imposed a tax and haven’t put a blanket ban. They are hoping for relaxation in the future. Well, let’s hope that the hopes of the crypto fraternity come to life.

In my opinion, crypto trading should have been treated like stock trading and investing. Profit/losses from intraday trading and derivatives trading can be classified as business income and losses and you pay tax as per your tax slab. While in crypto, no matter what tax slab you fall under, the tax rate is still going to be 30%. 

Further, stocks and mutual funds also have short-term capital gains and long-term capital gains applicable. There is no such provision for crypto income. Introducing the concept of capital gains could have encouraged long-term fundamentals-based investing in cryptos. 

But then, encouraging investments in crypto wasn’t the objective, was it?

(The author is Founder, 7Prosper, Personal Financial Planner & Investment Advisor.)

The suggestions/recommendations around cryptocurrencies in this story are by the respective commentator. Financial Express Online does not bear any responsibility for their advice. Please consult your  financial advisor before dealing/investing in cryptocurrencies.