Crypto Tax Planning: FAQs ft. Neha Nagar

The Union Budget proposal, effective from 1 April 2022, introduces Section 115 BBH to tax the profits on Virtual Digital Assets(VDA) at a flat rate tax of 30%, under the Income Tax Act 1961. It includes the following provisions, applicable from the financial year 2022–23:

• A flat 30% tax on crypto gains arising from the transfer of virtual digital assets or crypto assets, irrespective of the period of holding.
• Losses from crypto assets cannot be set off against profits from other income.
• No deductions are allowed, except for the cost of acquisition of VDA.

Since the announcement, we received a lot of queries on the tax implications of crypto transactions. To address these questions and clear all doubts, we invited Neha Nagar, a tax expert on our YouTube live, which aired on 28 March 2022. Read on for some key insights from the conversation.

#1 How will crypto gains be taxed from 1 April 2022?

Gains arising from crypto transactions will be taxed at a flat 30%, irrespective of the holding period, and the gains from one coin cannot be set off against the loss from other coins. Let’s check out two scenarios to understand this better.

Scenario 1: Suppose you sold your bitcoins and made a profit of ₹1,000 during the financial year 2022–2023. Your total tax liability will be: ₹1000 * 30% = ₹300.

Scenario 2: Now alternatively, let’s suppose you sold your bitcoins and made a profit of ₹1,000, and a loss of ₹500 after selling SHIB tokens. Your total tax liability will still be ₹300. This is because, under the tax provisions applicable to this year, loss from the selling of a crypto asset cannot be set off against the profit arising from the sale of another one.

However, there is one exception to this. If you have made both profits and losses as a result of trading with 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.

#2. Does the 1% TDS apply to all crypto transactions?

As per the Finance Bill 2022, Tax Deducted at Source (TDS) will apply to crypto transactions from 1 July 2022. At present, we are waiting for the government to offer greater clarity on how the TDS will be deducted and which specific types of transactions will come under its ambit.

#3. How does one plan tax arising from crypto transactions for this year?

There are no provisions in Section 115 BBH of the Finance Bill 2022 that might help taxpayers reduce their net crypto tax liability. However, there is a small window available in the current financial year, up to 31 March 2022, which you can use to partly save on crypto taxes through tax planning.

Tax planning is a strategy investors use to reduce the impact of taxation on gains—crypto or otherwise. It may especially interest you given the tax on crypto that was introduced this year.

#4. How does crypto tax planning work?

A buyer who has unrealized gains in any of their crypto assets can sell the asset before 31 March 2022 and re-buy it soon afterward. In this way, they can pay the capital gains tax on the net realized gains as per the tax slab applicable in their case, rather than accepting a higher rate. The new buy price will now become the acquisition price for the next transaction. 

Now let’s look at two scenarios to explain how crypto tax planning or harvesting works.

Scenario 1

Imagine you bought Bitcoin worth ₹10,000 a year ago. It is now valued at ₹25,000. If you continue holding it up to some point next year and then decide to sell, you will have to pay a flat 30% tax on the net realized gains.

By executing the tax harvesting strategy, you can reduce the overall tax impact. To do this, you need to sell your Bitcoin before 31 March 2022 and buy it back at the same price in a while. Here, you will need to pay taxes as per your applicable tax slab.

Suppose, your income falls in the ₹5,00,001–₹7,50,000 tax slab, the taxes applicable will be ₹12,500 +10% of your total income exceeding ₹5,00,000. The total tax liability will be less than ₹1,500. And, if you had sold your bitcoins on 1 April 2022, the tax liability would have been ₹4,500 (assuming that the prices are stable).

Scenario 2

You have multiple crypto assets in your portfolio, but not all of them are profiting you. So you sell the profitable ones at first and buy them back in the next transaction. You then make a third transaction, selling the loss-making assets, to settle the loss against the profit booked in the first transaction.

In this way, you can lower the net realized gains and the overall tax implications. Continuing with the example presented as Scenario 1 here, let’s assume you have invested ₹10,000 in ADA, which is currently worth ₹5,000. In this case, along with Bitcoin, you can sell ADA at loss and set off the loss against a profit of ₹15,000, which was booked on selling Bitcoin in the first place.

Therefore, your net realized gains will be ₹10,000, which will further reduce the tax implications.

On the contrary, the new tax rule does not allow you to set off losses against the profit from other coins. So your entire profit will be taxed at a flat 30% rate, irrespective of the loss booked on other coins. 

#5. What are the things to keep in mind when doing your crypto tax planning this year?

Tax harvesting is an effective tax-saving strategy, but you need to keep the following points in mind while executing it:

• If you do use the tax harvesting strategy mentioned here, you must buy back the asset for approximately the same price you sold it for, to ensure continuation in investments.
• The tax harvesting strategy mentioned in this article may only apply to the current financial year, as the next one is likely to have new taxation rules.
• If you fall under a higher tax bracket, with an income of over ₹12.5 lakh, you will need to calculate your total tax savings before executing the tax harvesting strategy. Otherwise, you may end up paying higher taxes on your gains. Consulting a CA is advisable because of this.
  
• Never under-report your crypto gains to save on taxes. Doing so would amount to tax evasion and can lead you to trouble.

#6. Is crypto tax planning a new concept?

No, crypto tax planning is not a new concept. It is a common practice among people investing in other asset classes and something that is well worth a shot in relation to crypto in the current context.

If you have any further questions about this strategy, remember that it is best to approach someone reliable like a tax and investment advisor, who will help you with all your tax-related queries and the filing. As they say, better be safe than sorry.