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Crypto losses can’t be set off against other income but can they be set off against crypto gains?


Budget 2022 has proposed to levy a flat 30% tax on capital gains from crypto currencies/assets, non-fungible tokens (NFT) etc. with effect from April 1, 2022. As per the budget proposal, this flat 30% tax will be levied irrespective of how long the virtual digital asset has been held by an individual. Further, no other deduction will be allowed except for cost of acquisition, and if there is a capital loss from a transaction in these assets then set-off against any other income or carry forward will not be allowed. Thus, if you incur a loss on investments in virtual digital assets, then the loss cannot be adjusted/set off against any other income to bring down your taxable income and thereby reduce your income tax liability.

The Budget 2022 Explanatory memorandum states: “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.”

Now, what will happen if you incur a loss trading in one crypto asset, say, in bitcoin, and make a profit in selling another one, say dogecoin? In such a scenario, can you set off the losses from bitcoins against capital gains made on dogecoins thereby reducing the taxable capital gains on the crypto assets?

As per tax experts, while the matter is ambiguous, it may be possible to set off crypto losses against crypto gains. Here is what different tax experts have to say regarding setting off of losses from crypto assets.

Shalini Jain, Tax Partner, People Advisory Services, EY India: 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. However, 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.

Dr Suresh Surana, Founder, RSM India: As per the Budget 2022 proposal, the loss arising from transfer of Crypto assets cannot be set off against any other income and also, it cannot be carried forward. Though, 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. 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 tax @30% plus applicable surcharge (nil in this case) and cess (1.2% viz 4% of 30% tax) resulting in an effective tax rate of 31.2%. 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: While presenting the budget, the Finance Minister said that loss from transfer of virtual digital asset cannot be set-off against any other income. Similarly, loss from other income is not allowed to be set-off against gains from transfer of virtual digital assets. However, the proposed provision, while it clearly addresses the above intention, is ambiguous regarding the set-off of crypto losses against crypto gains. Based on our reading, 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. However, more clarity is still awaited on this adjustment. The entire scheme appears to be a welcome step for the Digital industry though lack of proper clarity or explanations may be time consuming and may increase workload of various appellate.”



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