Capital Gains Tax: What Is It and How Does It Affect Your Crypto Gains

In the Union Budget for this financial year 2022-23, the government brought cryptos and other virtual assets under the purview of the capital gains tax. However, gains from buying and selling cryptos are not treated like other asset classes as far as taxes are concerned. All of this is very new and many are justifiably confused.

Hang around if you want us to clear up all your questions about capital gains tax on crypto.

Key Takeaways

• Capital gains tax is a charge on profits made from buying and selling of capital assets.
• Capital gains tax on crypto assets was introduced in the Union Budget of FY 2022–23.
• There is a flat 30% capital gains tax applicable on crypto gains, irrespective of the period of holding.
• No deduction is allowed, except deduction of acquisition expenses (trading fee) from total crypto gains.

What is Capital Gains Tax?

Capital gain refers to any profit arising from the sale of capital assets. And the tax that is levied on these gains is termed “capital gains tax.”

Generally, there are two types of capital gains tax: short-term and long-term.

Short-term capital gains tax (STCG) is levied on gains from investments that have been held for less than 12 months. Whereas, long-term capital gains tax (LTCG) is levied on gains from investments held for more than 12 months.

Both STCG and LTCG are applicable on gains arising from the sale of all traditional asset classes, including stocks, mutual funds, debt, property, etc.

How Capital Gains Tax is Treated in Cryptos?

In the Union Budget this year, the government has announced that effective from 1 April 2022, profits from digital assets, including crypto assets, will be charged a flat tax of 30%, irrespective of the duration of holding.

A rule that applies to the calculation of this tax on crypto transactions is as follows:

One cannot set off the loss from the sale of crypto assets with the profit of another crypto coin. This means that while computing tax, each transaction should be considered separately.

So if there is a gain of ₹10,000 from your Bitcoin transaction, you cannot set off the loss arising from any other crypto transaction against it. You will need to pay the flat tax of 30%, i.e. ₹3,000, plus the surcharge and cess applicable to the transaction.

However, there is one exception to this rule. If you have made both profit and loss as a result of trading one specific crypto coin on two or more different occasions during the same financial year, you can set off the losses with the profits and pay tax only on the net gains.

The introduction of this tax is in accordance with Section 115 BBH of the Income Tax Act of 1961.

Calculating Capital Gains Tax on Crypto Assets

To calculate the total gains from crypto or virtual digital assets, you need to keep in mind the following things:

No deduction is allowed

While calculating the tax due, the government has not allowed taxpayers to deduct any expenses other than the acquisition cost, which is nothing but the trading fee paid to process the trade orders. So essentially, this is how you can calculate the tax:

Net gains from crypto assets = Sale proceeds – Buying cost – Trading fees incurred on both buy and sell orders

No setting-off or carrying forward of losses

Another point to note is that the government has not allowed taxpayers to set off or carry forward losses from crypto investments against the profit earned in subsequent years. All gains and losses in any financial year should be considered while calculating capital gains tax for that year.
Calculating Capital Gains Tax on Crypto

Calculating the capital gains tax from crypto gains is actually quite simple. You just need to calculate 30% of your crypto profits to know the total tax liability.

However, when you enter into multiple crypto trades in a financial year, there is no guarantee that all trades will turn out to be profitable. Hence, you will need to calculate the net gains.

The following table shows, how to compute capital gains tax on your crypto transactions.

In the table above, we can see that there are two BTC trades: the first trade was booked at a profit of ₹3,500, and in the other trade, ₹700 loss was booked. Here, we can set off the loss, since it relates to one specific crypto coin, and not two or more different ones. The total taxable gain from BTC trades is, therefore, ₹2,800.

And in another trade relating to DOT, a profit of ₹10,800 was booked. Since we cannot set off losses against profit arising from another crypto coin, we exclude the loss arising from the SHIB trade from our calculation of profit. Therefore, the total taxable gain is: ₹10,8000 + ₹2,800 = ₹13,600.

Process of Paying Capital Gains Tax on Crypto Assets

The capital gains tax on crypto assets should be paid while filing your income tax returns for the year. However, if during the financial year, the estimated tax liability is more than or equal to ₹10,000, you will need to pay an advance tax.

As per the Income Tax Act, the initial 15% of the estimated advance tax is due for all taxpayers on or before 15 June each year. After this, 45% must be paid by 15 September, 75% by 15 December, and the remaining amount by the 15th March.

For example, if your estimated tax liability for the current financial year is ₹50,000; then by 15 June 2022, you will have to pay ₹7,500 as advance tax, ₹15,000 by 15 September, ₹15,000 by 15 December, and ₹12,500 by 15th March.

So while filing your annual income tax returns, adjust the final computed tax liability with the advance tax that has already been paid. If you have paid in excess, you can request a refund.

Wrap-Up

The introduction of a comprehensive capital gains tax on cryptos has been a relief for buyers and has helped standardize the taxation of crypto gains. You should note the new rules regarding the capital gains tax on cryptos or virtual digital assets will be effective from 1 April 2022.

If you are still confused or are finding it difficult to calculate taxes, seek the assistance of tax advisors.

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