Is Set Off of loss from Crypto Income not allowed?

The Regulators and the Governments across the globe 

are consistently trying to get hold of the latest developments in the Crypto World. One of the ways is to include the Crypto Transactions under the ambit of Tax.

While a few of the countries have given Crypto Currencies the status of a Legal Tender, a few others accepted the same as an Asset. But, there are different opinions about the taxation of the same across the boundaries.

India is no different a case. While the Government has neither accepted nor banned the Crypto Currencies, but the Finance Act 2022 has come up with its own interpretation to Tax the earnings out of Crypto Currencies.

The Finance Act 2022 has inserted a new section for the taxation of Crypto assets and Non fungible tokens. The Act accepted Crypto Currencies under the definition of Virtual Digital Asset.

Definition of Virtual Digital Asset in India

According to Section 2(47A) of the Income tax Act virtual digital asset” means:

(a) any information or code or number or token (not being Indian currency or any foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account including its use in any financial transaction or investment, but not limited to investment scheme and can be transferred, stored or traded electronically; (b) a non-fungible token or any other token of similar nature by whatever name called; (c) any other digital asset as may be notified by the Central Government in the Official Gazette in this behalf.

It is further proposed to provide that the Central Government may, by notification in the Official Gazette, exclude any digital asset from the definition of virtual digital asset subject to such conditions as may be specified therein.

The definition seems to be inclusive and by the very interpretation of it, all types of Crypto assets and NFTs are Virtual digital assets according to this section.

Taxation on Earnings from Virtual Digital Assets

Along with the definition of Digital Virtual Asset, the taxation on the earnings from the same was also determined. The section determining the taxation read as:

115BBH. Tax on income from virtual digital asset. —

(1) Where the total income of an assessee includes any income from the transfer of any virtual digital asset, notwithstanding anything contained in any other provision of this Act, the income-tax payable shall be the aggregate of, —

Example: Mr. A earned an Income of Rs. 6,00,000 from Business and Rs. 80,000 from Investment in Crypto Assets, Amount of the Tax will be:

Income from transfer of Crypto Assets = 80,000 Tax Rate 30% Tax = 24000

Normal Income = 6,00,000

2,50,000

2,50,000 – 5,00,000 5% 12,500 (5,00,000-2,50,000) 5%

5,00,000- 10,00,000 20% 20,000  (6,00,000-5,00,00) 20%

Total=32500

Grand Total = 24000 + 32500 = 56500 + Cess + Surcharge (if applicable)

Note: Even if there is no Income from any other source, the tax is payable on the earnings from Crypto Assets @ 30% only. Hence, the provisions of Minimum Income do not apply to the Income earned from Crypto Assets.

Is Set Off and Carry Forward of Losses from the Crypto Assets allowed?

(2) Notwithstanding anything contained in any other provision of this Act, —

The basic interpretation of the above would be that the Income earned from Crypto Assets (Virtual Digital Assets) is to be considered on a standalone basis and there is no relaxation of any kind provided for the losses earned in the transactions of Virtual Digital Assets.

Analysis of the Provision-

1. There will be flat rate of 30% on Income from Virtual digital assets (Surcharge + Cess)

2. Only Acquisition cost is allowed as a deduction while calculating the profits earned from the transaction of the Virtual Digital Asset.

3. No deduction of any expenditure, other than the acquisition cost as mentioned in point 2 above, will be allowed while calculating such income

Is set off from losses incurred in transacting one Virtual Digital Asset allowed from the profit earned in transacting some other Virtual Digital Asset?

Many experts are of the opinion that such a set off is not allowed.

However, CoinGabbar is of the opinion that the same is allowed to be set-off. Our opinion is based on the following points:

1. The clause talks about the non-allowance of the set off of losses from any income calculated as per the Income Tax Act. However, it is silent about the calculation of Income from Digital Virtual Assets and its methodology. The principles of calculation income from any source warrant the income from the source as a whole and not individual transactions. It can be safely inferred that the Income from Digital Virtual Assets is to be taken as a whole after adjusting the Profits earned from Digital Virtual Assets with the losses incurred from Digital Virtual Assets. And the income calculated hence will be liable for taxation at the specified rates.

2. Also, the Hon. Supreme Court of India, has ruled under 2 different instances that the Income from a source cannot be disintegrated into incomes from different transactions done under the same source of Income. The rulings say that the losses incurred under the same source of Income should be set off against the Incomes to arrive at the taxable income. This judgement was given under the pretext of the Commercial Principles of Computing Profits.

Ref: Subbaramaiah and Co. v CIT (1964) 51 ITR 742 (AP) and

CIT v Indo-Mercantile Bank Ltd. (36 ITR 1) (SC)

1. Also, there are 3 different terms governing the Set Off and Carry Forward of Losses:

1. Inter Head Set Off: This kind of Set off is allowed between the different heads of income. Like the loss in the Head Income from House Property can be St Off against the Business Income.

2. Inter Head Set Off: In this way, the Income from Same Head can be set off against the losses against the same head in different source. For Example, Income from One Business can be Set Off against the Losses incurred in some other business.

3. Intra Source: This is not actually a set-off of Income. This kind of adjustment tantamount to the calculation of profit after consolidating different transactions under the same source of Income. For example, a Grocery Vendor will Calculate the Profit only after aggregating the Profits from the sale of Sugar and the Loss from the Sale of Rice.

Hence, in case of the Calculation of Profits from Crypto Currency, all the Profits and Losses happening from Different Transactions are to be consolidated and adjusted before the Income from the Source of Crypto Currency can be Calculated.

This is again a case of principle of calculation of the Profit of Business where different transactions cannot be considered separately.

Example:

Mr. A traded in Bitcoin Mr. A traded in Ethereum 

Cost of Acquisition of Bitcoin : 10,00,000 Cost of Acquisition of Ethereum : 10,00,000  

Sale Consideration of Bitcoin : 9,10,000 Sale Consideration of Ethereum : 12,10,000

Loss from Bitcoin : 90,000 Profit from Ethereum : 2,10,000

Now because these both transactions are intra source in nature Income from Capital Gain will be computed after set off of profit and loss of both these transactions.

So, according to our opinion only Rs. 1,20,000 is taxable (210000-90000)

In our opinion there  will be only one situation in which this set off is not allowed that is, if an investor have an over all loss during the FY 

Mr. A traded in Bitcoin Mr. A traded in Ethereum 

Cost of Acquisition of Bitcoin : 10,00,000 Cost of Acquisition of Ethereum : 10,00,000  

Sale Consideration of Bitcoin : 9,10,000 Sale Consideration of Ethereum : 8,10,000

Loss from Bitcoin : 90,000 Loss from Ethereum : 1,90,000

Total Loss during the FY is Rs. 2,80,000 , so this loss from trading in Crypto assets will not be eligible to set off and will get ignored. 

Definition of Transfer to be considered for calculation tax on the VDA

For the purposes of this section, the word "transfer" as defined in clause (47) of section 2, shall apply to any virtual digital asset, whether capital asset or not.

Meaning of the transfer: The definition of “transfer” under section 2(47) shall apply for the purpose of computation of tax.

According to section 2(47) of the income tax act , Transfer”, in relation to a capital asset, includes:

(i) Sale, exchange or relinquishment of the asset;

(ii) Extinguishment of any rights in relation to a capital asset;

(iii) Compulsory acquisition of an asset;

(iv) Conversion of capital asset into stock-in-trade;

(v) Maturity or redemption of a zero coupon bond;

(vi) Allowing possession of immovable properties to the buyer in part performance of the contract;

(vii) Any transaction which has the effect of transferring an (or enabling the enjoyment of) immovable property; or

(viii) Disposing of or parting with an asset or any interest therein or creating any interest in any asset in any manner whatsoever.

Interpretation of the application of section 2(47):

Transfer includes exchange: If any VDA is received against the exchange of any other VDA, the same will be considered as a transfer and shall attract applicable taxes.

For Example: If you convert the BTC into USDT then also it will be treated as transfer and taxability will arise.

Nature of Income: 

From the plain language of the section it is not clear that such income will be treated as business income or income from capital gain.

According to section 2(14) of Income Tax Act, a capital asset means property of any kind of an assessee whether or not connected with his business. 

VDA may be treated as capital assets if it is acquired by the assesee for the purpose of investment, in such case income will get taxable under the head Income from Capital gains.

If such assets are held for the purpose of regular trading then income from such assets may get taxed in business head.

Concluding Remarks

There is a lot of ambiguity about the applicability of the Act on the Taxation of VDA since its very inception. However, the following points are clarifies:

1. The Income from Crypto Assets can be Adjusted against the Loss for any other Transaction of Crypto Asset, within the same Year

2. There Nature of Income, whether Capital or Business, will be determined on the basis of the period of holding

CoinGabbar has made an attempt to shed light on such ambiguities and resolve them in the most logical manner and we are presenting our opinions based on logical discussion and prevailing judgements.

We invite opinions and discussions to improve our opinion of the matter. For reviews, please write to us at: content@coingabbar.com