With the prices of bitcoin taking a serious tumble the resultant bitcoin losses can be used to save the capital gains tax this fiscal year by booking them in advance i.e. before March 31, 2018.
Saving on capital gain tax by booking bitcoin losses this fiscal year
Cryptocurrencies have only risen in popularity and increased in adoption this year. Last year, in mid-December this sector saw a massive price rise with its market size rising to its peak at $800 billion. However, all those profits went to drain when in January the crypto market got hit with the wave of equally massive price dip.
Currently, the market is yet again in the red after experiencing a bit of green in the mid of first quarter. From bitcoin, ethereum to litecoin every digital currency is going through huge price drops.
The most popular cryptocurrency of them all, Bitcoin (BTC) that once hit $20,000 is now riding at $7,000. As a result, a number of investors have booked for huge bitcoin losses on their investment.
Classification of cryptocurrency as an asset: Money vs enterprise
First of all, how do you classify your cryptocurrency as per the income tax guidelines and how to address the losses so incurred on them?
The Money Tax Act, 1961 doesn’t talk about the taxability of cryptocurrencies. However, by following the basic provisions of Income Tax Act, if you as a taxpayer is holding the crypto as an investment, then they are considered as fund assets.
Classifying cryptos as fund assets mean any gains from them will be taxable as money gains. If you are holding the crypto for more than 36 months, it is extensive-phrase cash asset. Whereas less than 36 months will get it regarded as brief phase money asset.
However, if bitcoin transactions are recurrent and substantial this means the taxpayer is buying and selling in cryptos. Hence, income from bitcoin transaction will be taxable as business revenue. Similarly, the losses from bitcoin buying and selling should be considered as company losses or money losses.
Now, the Money Tax Act lets a taxpayer adjust their losses incurred in comparison to other taxable incomes that are subject to restrictions.
Classification of cryptocurrency as a business: Speculative vs non-speculative
The categorization of business into speculative and non-speculative by the Income Tax Act allows the losses of enterprises i.e. non-speculative ones to set-off against any other income of a taxpayer. Whereas a speculative business can only set off its losses against other speculative revenue which means if cryptocurrency investment is considered speculative transaction then the loss in one crypto say bitcoin can be set off against the speculative gain in other crypto say ethereum.
For a transaction to be considered speculative, the IT Act says there is no actual delivery. Reportedly, due to the reason that when a cryptocurrency buyer makes the purchase of a crypto, the individual do gets the supply of crypto in their wallets, hence, crypto transactions can’t be deemed speculative.
Now: Carry forward or set off
The set off of losses against revenue is allowed by the Income Tax Act and if it can’t be established in the current year, it could be carried off for the set offing against future profits. In speculative business, this carried off is only allowed for 4 years.
If cryptocurrencies are considered cash property, the long-term losses can only be monitored for the long-term gain. If the cash loss is short term then it can be adjusted against any fund gains i.e. short and long term both. However, if they are treated as company belongings, then losses incurred can be altered in opposition to any other money revenue including fund gains.
What are your thoughts on taxability on bitcoin losses and adjustment of cryptocurrency profits and losses? Share your thoughts with us!