Crypto losses and how to adjust them

New Delhi: In her Budget 2022-23 speech last month, Finance Minister Nirmala Sitharaman proposed to levy a 30 per cent tax on capital gains from cryptocurrencies/assets, non-fungible tokens etc. from the next fiscal. The Budget further stated that a flat tax would apply irrespective of how long an individual has possessed the virtual digital asset.

While the finance minister announced a tax on virtual assets, she also made it clear that no exemption will be given except for the cost of acquisition. Furthermore, if an individual incurs a loss on the transaction in these assets, they will not be allowed to set-off the loss against any other income or carry forward.

The Budget 2022 Explanatory memorandum read, “No deduction in respect of any expenditure (other than cost of acquisition) or allowance or set off of any loss shall be allowed to the assessee under any provision of the Act while computing income from transfer of such asset. Further, no set off of any loss arising from transfer of virtual digital asset 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.”

Hence, if an individual makes a loss on investments in virtual digital assets, they will not be able to set them off against any other income to bring down their taxable income. So, what if someone incurs a loss trading in one crypto asset and makes a profit in selling another one? Could this loss be adjusted against the other crypto gain?

Further clarity on crypto tax is still needed from the Centre, however, experts opine that adjusting crypto losses against crypto gains might be possible. Here’s what they believe:

“115BBH(2)(b) of the Income-tax Act, 1961 provides ‘no set off of loss from transfer of the virtual digital asset computed under clause (a) of sub-section (1) shall be allowed against income computed under any other provision of this Act to the assessee and such loss shall not be allowed to be carried forward to succeeding assessment years’. Loss is not allowed to be either carried forward to next year or set off against any other income in the same year,” Shalini Jain, Tax Partner, People Advisory Services, EY India, told ET.

She added that it may be possible to set off loss with income earned under this section as the clause provides ‘no set off………against income computed under any other provision of this Act’ which means income under this provision/section should be allowed.

Meanwhile, Dr Suresh Surana, Founder, RSM India stated that it can be inferred that the loss arising from transfer of Crypto assets can be set off against gain arising from the transfer of Crypto assets in the same financial year.

He said, “To understand this better, say an individual has salary income of Rs 18 lakh, gain on sale on Bitcoin of Rs 6 lakh and loss on sale on Litecoin of Rs 2 lakh, he can set off the loss and the net gain from the sale of Crypto Assets (both Bitcoin and Litecoin) would be Rs 4 lakh. The net gain of Rs 4 lakh would be subject to 30 per cent tax plus applicable surcharge (nil in this case) and cess (1.2 per cent viz 4 per cent of 30 per cent tax) resulting in an effective tax rate of 31.2 per cent. With respect to the salary income of Rs 18 lakh, the income tax slab and rate applicable to him will depend on the tax regime opted by him during the financial year.”

L Badri Narayanan, Executive Partner Lakshmikumaran & Sridharan Attorneys also opined that it is possible to interpret that loss from one cryptocurrency, say Ethereum, can be set-off against gain from another cryptocurrency, say Bitcoin or Litecoin.