Quote from: squaretriangle on March 22, 2022, 04:45:57 PM

Quote from: webtricks on February 21, 2022, 04:57:38 PM

Preface: To keep the thread short and readable, I have decided to cover one issue in each thread. This thread specifically covers the taxation on profits earned by crypto traders and investors as per the bill announced in the recent budget. I will cover the taxation on other incomes in the future threads.

Government has finally announced the specific section for the taxation of cryptocurrencies. However, the budget speech was bit ambiguous especially about no loss set-off rule so it took me a little digging and discussion with other professionals to finally understand the whole new taxation proposal (remember it's still a proposal, bill is not yet passed in the Parliament). In this thread, I will be discussing the new proposed section i.e. Section 115BBH and how will it effect the profits earned by traders and investors.

If I summarize the section in a single line then 'every realized gain made by a trader is taxable @30%'. However, it raises several questions so let's answer them one by one:

Question 1: What is a realized gain?
Answer: A financial year runs from April 1st to March 31st. If you buy BTC on 1st October for ₹20 lakh and sell it on 1st January for ₹30 lakh then this is called a realized gain and you have to pay tax on the profit of ₹10 lakh. However, if you don't sell the BTC and its value increases to ₹35 lakh on 31st March then ₹15 lakh is your unrealized gain and no tax is to be paid.

Question 2: How to calculate my gains?
Answer: Every investment is a separate taxable event. To calculate profits, you have to see every crypto investment of yours in an isolation. Profit is the difference between the price at which an investment is sold and the price at which it was bought (i.e. cost of acquisition). Calculation gain on each of your investment sold during the year, club all the gains and pay tax on the aggregate profit.

Question 3: Do I have to pay tax only when I realized the money in INR i.e. withdraw the money to the bank?
Answer: No, you have to pay tax every time you make a realized gain, there is no condition that the amount has to be withdrawn to the bank. Section 115BBH specifically includes this statment - 'income from the transfer of any virtual digital asset'. Here's an excerpt from the definition of transfer as per Section 2(47):

The word 'exchange' covers all transactions related to converting one cryptocurrency to another. So, if you purchase ETH for 2000 USDT and then sell it for 2300 USDT, you still have to pay tax on 300 USDT even when you haven't realized USDT to INR. Keep this in consideration when you are doing trading on the exchanges like WazirX, every sale/purchase transaction will be considered for taxation even when you haven't withdrawn any profit to the bank.

Question 4: Am I allowed to set-off loss made on one trade with the profit made on another crypto trade?
Answer: This is probably the most asked question by the traders since the proposed bill is out and to be honest government itself made it very unclear in the bill. I will be discussing this as per my understanding and I maybe wrong on this one. Let us first see the sub-section (2) of Section 115BBH where it is announced:

The clause (a) made it very clear that nothing is allowed to be deducted against the profit earned from crypto trade except cost of acquisition i.e. the buy price. However, clause (b) contradicts the above clause. It states that any loss from the crypto trade cannot be set-off against any income under any other provision of the act. The term 'other' here signifies that loss cannot be set-off against any income other than the crypto income which means that the loss from the one trade can be set-off from the profit made on the other crypto trade.

My take: Investors will be allowed to set-off losses from the profits and they will only have to pay tax on the net profits earned during the year. The clause (a) has a typo and most probably will be rectified and the term 'other' will be included in the first clause as well when the act will be enacted in March 2022.

If you have any question related to taxation on crypto trading and investment, feel free to ask in the thread.

@webtricks. can one off-set losses if they invested in a coin that went all the way to zero or rug-pulled?

No you can't, and this is really the biggest problem with the law. Your profit would be treated as a standalone profit and your losses won't be considered as a loss while filing your tax return. This means even if you incur a loss after you have made a profit, you'll still have to pay up the tax on that profit that you have made.

"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 this Act in computing the income referred to in clause (a) of sub-section (1); "

This line makes it quite clear that no set off will be allowed against any gain that you have made in cryptos.