The Difference in Taxation of Crypto Currencies in India before and After Budget 2022.

There was neither a definition of Virtual Digital Asset or Cryptocurrency nor a specific charging provision to deal with gains arising from transactions in Virtual Digital Assets.

This meant that taxation of gains from transactions in Cryptocurrencies before 1^st April 2022 would be dealt with under the provisions of the Income Tax Act, 1961, absent s.115BBH.

International Tax Planning would depend on whether the holder treated the Cryptocurrency as a business asset or a Capital Asset.  In case of treatment thereof as a business asset, the taxpayer will be taxed at the applicable slab rate and in case of treatment thereof as a Capital asset, for such currency held for more than 36 months, the tax will apply at the rate of 20% in terms of s.112 of the Income Tax Act, 1961.  For a cryptocurrency treated as a capital asset and held for less than 36 months, transfer thereof will entail tax at slab rate for assets.

Finance Act, 2022 introduced a new section 115BBH specifically for taxing gains from transactions in Virtual Digital Assets.

115BBH

(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—

(a)  the amount of income tax calculated on the income from transfer of such virtual digital asset at the rate of thirty percent.

(b)  the amount of income tax with which the assessee would have been chargeable had the total income of the assessee been reduced by the income referred to in clause (a).

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

(a) no deduction in respect of any expenditure (other than the cost of acquisition, if any) or allowance or set off of any loss shall be allowed to the assessee under any provision of this Act in computing the income referred to in clause (a) of sub-section (1); and

(b) no set off of loss from the transfer of the virtual digital asset computed under clause (a) of sub-section (1) shall be allowed against income computed under any provision of this Act to the assessee, and such loss shall not be permitted to be carried forward to succeeding assessment years.

(3) 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 a capital asset or not.

Thus w.e.f advent of s.115BBH

1. Investors will have to pay up to 30 per cent tax on the returns they make from trading or investing in cryptocurrencies or other digital assets such as NFTs.
2. For taxing gains u/s.115BBH, there must be a cryptocurrency transfer, giving rise to profits and gains.
3. While computing gains on VDA transfer, deduction of any expenditure or allowance or set off of any loss is not permitted; set off of loss from the transfer of VDA.  Only the Cost of acquisition is allowed to be deducted.
4. According to the announcement, any losses from the transfer of virtual digital assets cannot be set off against any other income, according to the announcement.
5. 115BBH(2)(b) states no set-off of loss from the transfer of virtual digital asset computed under clause (a) of sub-section (1) shall be allowed against income computed under any provision of this Act, and such loss shall not be permitted to be carried forward to succeeding assessment years.  This will therefore include income calculated u/s.115BBH as well, meaning that loss from the transfer of one Cryptocurrency could not be offset against profit generated from the transfer of another cryptocurrency.

Carrying forward and set off of losses from Crypto Currency Transaction undertaken before and after 01.04.2022

In light of provisions of s.115BBH set off of losses from the transfer of VDA computed under section 115BBH(1)(a) shall be allowed against income computed under any provisions of Indian Income Tax Act, 1961 (including an income u/s.115BBH(1)(a) itself)

This applies with the advent of s.115BBH.

Treatment of losses generated before the transfer of Cryptocurrencies before the advent of s.115BBH will be governed by provisions of s.70 to s.74 of the Income Tax Act, and set off and carrying forward will be ordinarily permissible.