Several nations do allow losses from one type of crypto dealings to be offset against another while filing for tax returns. However, the Indian Government is firm about not allowing this to happen. In other words, the demarcation between gains and losses is very well defined for taxpayers.
If you are a crypto enthusiast, you should have a good understanding of the new laws in place.
The ‘Losses’ Law
Suppose, you are an investor. You have sustained losses from a specific VDA (virtual digital asset). These losses may not be set off against the profits obtained from the dealings carried out by another VDA. You may not even mention them while filing for income tax returns.
To illustrate, suppose you own two classes of digital assets – Bitcoin and Ethereum. Bitcoin sales yield gains of INR 100,000. However, trading in Ethereum results in losses worth INR 50,000. While filing for income tax returns, you will have to include a 30% tax linking to the Bitcoin profits.
However, the law will not permit losses from Ethereum trading to be set off against the Bitcoin profits. In case, this set off had been allowed, then you would have had to pay the 30% tax only on the overall net gain of INR 50,000. Thus, every virtual digital asset is separate from the other. Profits/losses for one VDA are independent of the same for another VDA.
Tips to Avoid Crypto Losses
Bitcoin dominates the crypto industry and the founders of crypto companies in India are cribbing about the law regarding losses. All of them feel that it will discourage people from investing in cryptos. They also fear that India is regressing, instead of progressing. Nonetheless, it remains to be seen how everything will work out in the coming months.
In the meantime, you may use the following tips to avoid trading losses as much as possible.
Do not Entertain FOMO or FUD
Becoming inundated with too much information can result in extreme confusion. The confusion can prompt you to rely on instincts alone. This may, in turn, lead to badly-timed trading deals.
What it really means is that you are giving in to FOMO or FUD. FOMO stands for fear of missing out. Here, you come across some positive news about cryptos. It convinces you that everything is perfect, and you should make haste to join the bandwagon. You fail to take an in-depth look at the subtle signals that can make things go drastically wrong!
FUD stands for fear, uncertainty, and doubt. In contrast to FOMO, all the news outlined here is negative in nature. It could be regarding prices, specific assets, etc. Your terror leads you to perform actions that you would not undertake if thinking sensibly. For instance, you could sell your holdings at low prices.
Therefore, always confirm, both, positive, and negative, news, through multiple sources first. Only then, work out a good strategy.
Have Clear Goals in Sight
It is always wise to invest in small amounts since crypto markets are so volatile in nature. In other words, invest only the amount that will not make too much of a dent into your holdings.
Ensure to diversify your portfolio. You should have access to long-term assets of different kinds. The portfolio could include various cryptos, stock market index funds, etc.
Take professional help to have well-defined strategies in hand, to counter volatile marketplaces. Know your entry and exit points well. Have alternate plans in hand for mitigating losses, which may arrive with unexpected crashes. To illustrate, you may sell/purchase small quantities of cryptos at regular intervals. This is the dollar-cost averaging strategy.
Weigh Safe Options
Whenever there is a market dip, strive to convert your crypto holdings into stabler assets. This way, you lock in your balance and lessen the adverse impacts of volatile markets. It also gives you time to manage your portfolio when crypto markets are bullish.
Then again, remember that Stablecoins strive to maintain fixed prices. Therefore, by having some stable-value assets in your kitty, you avoid the risks posed by bearish markets.
Whether you decide to buy or sell, keep track of the profit/loss margin that will keep you comfortable. This way, you need not engage in decision-making under pressure and can avoid stress.