The proposed taxation of virtual digital assets (VDAs) may be a double-edged sword for investors. While it levies a 30 per cent tax on the gains made on transactions in VDAs, there may be no provision for setting off losses against gains made in other cryptocurrencies or any other assets. Clarity is still awaited on this aspect.
This is how it is likely to work. Suppose you have Rs100 each in Bitcoin (BTC) and Ethereum (ETH) and you make gains of Rs10 in BTC and lose Rs10 in ETH. In this case, the value of your overall crypto portfolio will remain at Rs200. However, you will have to pay 30 per cent tax on the gain of Rs10 that you make on BTC as it won’t be set off against the loss of Rs10 on ETH.
“As per the Budget proposals, set-off of losses from VDA (virtual digital asset) transactions against gains from any other income (in the year of initial VDA transaction) as well as carry forward of such loss from VDA (for set-off in future years) are not allowed. The proposed amendment also suggests that loss from one form of VDA (for example, Bitcoin) cannot be set off against gains from another form of VDA (for example, non-fungible tokens or NFTs) and this may be harsh on investors who have such losses,” says Alok Agrawal, Partner, Deloitte India, a tax consultancy firm.
The Union Budget 2022 introduced a new Section 115 BBH in the Income-tax Act, 1961, which specifically deals with the taxation of VDAs like NFTs, cryptocurrencies, and others. A new clause 47A defines VDAs.
Section 115 BBH, which introduced the 30 per cent tax on VDAs, also specifies that no deduction other than the cost of acquisition of the said VDA is to be allowed while computing tax payable. It also specifies that no carry forward of losses and set-off of losses under any other provision of the Income-tax Act shall be allowed.
“The budget proposal has defined VDA which includes cryptocurrencies (information or code or number or token generated though cryptographic means or otherwise). While this may be construed as capital asset or stock in trade depending on the purpose of holding, the income from transfer of VDA will be taxable under the proposed special provisions at 30 per cent (plus cess, and surcharge will also be applicable where aggregate income is in excess of Rs 50 lakh),” says Agrawal.
While Section 115 BBH clearly specifies that no deduction other than the cost of buying the said VDA shall be allowed as a deduction while computing the tax payable, there’s a small catch. Clause (b) of section 115 BBH (2) says that no set-off and carry forward of losses in these virtual digital assets shall be allowed to any assets under any other provision of the Act.
One possible interpretation of this clause could be that the losses arising under this section (115 BBH) can be set off against gains under this section but not under any other section.
“To ensure that this matter is free from any doubt, one hopes that the CBDT (Central Board of Direct Taxes) will issue a clarification explaining if the tax treatment of different types of VDAs was intended to be restrictive as above,” says Agrawal.
Another explanation can be that losses under this Section could not be set off in entirety with any gain in any other section of the Income-tax Act.
“Set off of losses from transfer of VDA is not allowed against any other income. It seems that set off is allowed against gains from VDA in the FY in which transfer is made. No carry forward of loss is allowed. While trading in the stock market allows carry forward of losses, tax treatment of shares cannot be compared to VDA. The government wants to ringfence VDA as a separate asset class,” says Abhay Sharma, partner, Shardul Amarchand Mangaldas & Co.
When it comes to other assets, both short-term and long-term capital losses can be carried forward for adjustment for up to eight assessment years immediately following the assessment year in which the loss was first computed. Long-term capital loss can be set off only against long-term capital gains, while short-term capital losses can be set off against both long-term gains and short-term gains.
However, Budget 2022 did not specify whether gains from VDAs are to be considered as long-term or short-term; Section 115 BBH did not specify the holding period of such assets.
“Other than the cost of acquisition of the VDA, the new proposals don’t allow deduction of any expenses (for example, transaction charges levied by exchanges) for the purpose of calculation of ‘income from transfer’ on which 30 per cent tax will be applied,” says Agrawal.
