FinMin says you can't set off losses in crypto trades to reduce tax burden

The Finance Ministry today clarified one of the more contentious issues mentioned in the cryptocurrency regulations announced during February's Union Budget by Finance Minister Nirmala Sitharaman.

In response to questions raised by Lok Sabha member, Karti Chidambaram —son of four time finance minister P Chidambaram— Union Minister Of State For Finance Pankaj Chaudhary highlighted that cryptocurrencies are currently unregulated in India.

One of Karti Chidambaram's questions pointedly quizzed the finance minsitry if losses incurred due to transfer of one virtual digital asset (VDA) can be set off against gains from another VDA.

In response, the minister quoted the provisions of the proposed section 115BBH of the Income Tax Act, 1961 wherein "loss from the transfer of VDA will not be allowed to be set off against the income arising from transfer of another VDA".

In a separate question, Karti had also inquired if the infrastructure costs incurred in mining cryptocurrencies are to be treated as cost of acquisition and are therefore permissible deductions.

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However, the proposed Section (2) (a) of clause 115BBH clearly spells out that, "no deduction in respect of any expenditure (other than the 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."

This means that other than the cost of purchasing the particular coin, no other deduction can be made on the 30 percent tax on cryptocurrency profits. Therefore, as Coin Crunch India founder Naimish Sanghvi puts it, "if you made loss in Bitcoin, you cannot set it off with profit in Ethereum."

In comparison, it is possible in certain situations to set off profits made in the stock market by loss-making investments in the stock market.

Similarly, other sections of income tax can be set off by deductions such as 80C, 80D, and others.

For clarity, this profit on trades is not limited to trades between Indian rupees and cryptocurrencies. Any trades between individual cryptocurrencies on an exchange will also incur taxes should the trader make a profit.

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Nischal Shetty, Founder of cryptocurrency exchange WazirX, puts it succinctly with a simple example. If an investor invests Rs 100 in coin 1, and Rs 100 in coin 2, with coin 1's value increasing to Rs 200 while coin 2's value reducing to Rs 0, you will end up with the same Rs 200 you started with.

However, since you have to pay 30 percent tax on coin 1's profit, but can't set off the equivalent losses in coin 2 in your income tax returns, you have to pay Rs 30 to the government even though you have not made any money on your trades.

You started with Rs 200, and are now left with Rs 170 despite earning no money on your crypto trades.

Earlier this month, Shetty had also talked about how, apart from the 30 percent tax on cryptocurrency profits, the 1 percent TDS on every transaction will end up forcing the government to return $900 million in income tax returns to crypto traders every year. Shetty had suggested a 0.1 percent TDS tax instead.