Crypto tax: Book gains before April 1 to reduce tax liability, says Taxmann's Naveen Wadhwa

While the Lok Sabha has passed the Finance Bill 2022 that introduced a new scheme to tax crypto gains at a flat rate of 30 per cent from April 1, 2022, questions abound on the tax treatment of past profits earned from cryptocurrencies. So, what happens if one books gains from cryptos on or before March 31, 2022? Do new income tax rules say one still has to pay tax at 30 per cent?

Tax experts say that if one is sitting on profits and doesn’t want to be invested for a long tenure, then selling before March 31 might be a good idea. This is because gains will be taxable like normal provisions before April 1, 2022 and treated as capital gains (if you are not doing trading in cryptocurrencies). Hence, if one sells cryptos after 36 months, the profit shall be taxable as Long Term Capital Gains (LTCG) at 20 per cent post indexation. If sold before 36 months, then short term capital gain (STCG) tax should be levied as per the income tax slab which can be anywhere ranging from 0-30 per cent.  

“It is advisable to sell crypto before April 1, 2022, as the gains will be taxed as per normal provisions like in the case of sale of gold. The long term capital gains will be taxable at the lower rate of 20 per cent with indexation. The short term will be taxable according to the tax slab one falls into. Moreover, if there are losses, they can be carried forward,” says Naveen Wadhwa, Deputy General Manager at Taxmann, a leading online resource for everything on Indian taxation laws.

The Finance Bill 2022, as passed by the Lok Sabha, inserted a new section 115BBH to provide the method of computation and the tax rate for the income arising from the transfer of Virtual Digital Asset (VDA). Now, according to the new rules, gains from cryptos will be taxable at 30 per cent, and there will be no provision for setting off and carrying forward of unclaimed losses.

Losses incurred on or before March 31, 2022

It is clear that the Finance Bill has stated that any loss arising from the transfer of VDA would be a dead loss. It will not be allowed to be adjusted even against income arising from the transfer of another VDA. But would such provision impact the losses incurred on or before the assessment year 2022-23, that is, from the sale of crypto assets or NFTs on or before 31-03-2022?  

“The assessee should have an absolute right to carry forward and set-off the losses incurred on or before 31-03-2022. However, such losses shall not be allowed to be set off against income taxable under Section 115BBH. Such rights can be exercised within the four corners of the law dealing with intra-head, inter-head and carry forward of losses” says Wadhwa.

If there are several sources of income falling under the same head of income, the loss from one source of income may be set-off against the income from another source falling under the same head of income. This is called as intra-head adjustment of losses.  

If after setting-off the loss from one source against the income of another source falling under the same head, the net result is still a loss, the loss under one head of income may be set-off against the income under another head in the same previous year. This is called as inter-head adjustment of losses.  

If a loss cannot be completely set-off against income under the same head (intra-head adjustment) and against income under another head (inter-head adjustment), then the losses remaining shall be carried forward to next year. Income Tax Act contains certain provisions which do not allow to set-off certain losses, but allow some of them in a particular manner and thus make the aggregation a legal concept.

Wadhwa supports the case of carrying forward of losses and cites a similar issue that was dealt with by the Supreme Court in the case of CIT v. Shah Sadiq & Sons [1987] 31 Taxman 498 (SC).  

In that case, the apex court held that under the 1922 Act, the assessee was entitled to carry forward the losses of the speculation business and set-off such losses against profits made from that business in future years. The right to carry forward and set-off accrued to the assessee under the 1922 Act. A right that had accrued and had become vested continued to be capable of being enforced notwithstanding the repeal of the statute under which that right accrued unless the repealing statute took away such right expressly. Hence, rights that have accrued are saved unless they are taken away expressly. In the circumstances, the assesse was entitled to the set-off in the assessment year 1963-64.