Crypto F&O Losses: How to Report Crypto F&O Losses in Your Income Tax Return (ITR)?

With the rising popularity of cryptocurrency trading, especially in Futures & Options (F&O), several taxpayers and professionals have a common query in their minds about how to report profits or losses from trading in Crypto Futures & Options (F&O) and whether they can be carried forward under the Income-tax Act, 1961. Below is the detailed breakdown.

Step 1: Speculative Transaction: Section 43(5) of the Income Tax Act, 1961

In accordance with Section 43(5) of the Income Tax Act, a speculative transaction is one where the contract is settled without actual delivery of the asset.

Now, when you trade in F&O (Futures & Options), the transaction is usually settled in cash, without actually buying or selling the underlying asset, so, on the face of it, this would be treated as speculative.

However, there is an exemption in this: if you are trading in F&O of stocks or commodities through a recognised stock exchange (like NSE or BSE), and if the proper tax rules are followed (like STT being paid), then such F&O trading is not treated as speculative.

Step 2: Are Crypto Exchanges Recognised Stock Exchanges?

This is where the actual problem starts; the term “recognised stock exchange” is defined under a different law, the Securities Contracts (Regulation) Act, 1956 (SCRA). Currently, crypto exchanges are not recognised under this law in India. Therefore, even if you are doing F&O trading in crypto, since it is not on a recognised stock exchange, the exception does not apply here. Hence, Crypto F&O is considered a speculative business under Indian tax laws.

Step 3: How Are Crypto F&O Losses Treated? (Section 73)

If your activity is treated as a speculative business, then the losses you make from Crypto F&O are also called speculative losses.

Under Section 73 of the Income Tax Act, speculative losses can only be set off against speculative profits, not against regular business income or salary income. These losses can be carried forward to the next 4 assessment years. However, in those years, too, you can only set them off against speculative income.

Hence, while you can carry forward Crypto F&O losses, you need to make sure they are correctly reported as speculative losses in your ITR.

Where to Report in ITR?

In your ITR form, there’s a section called “Schedule P&L”, which has a part for reporting speculative business income or loss. That is exactly where Crypto F&O gains or losses should be shown.

Common Mistakes to Avoid

Maximum individuals are making mistakes by wrongly showing Crypto F&O under “ordinary business” or under 115BBH (VDAs). Here’s what they are doing wrong:

Several individuals report it as ordinary business income; this is incorrect because it’s speculative in nature. While some report it under Section 115BBH, which deals with Virtual Digital Assets (VDAs) like Bitcoin, NFTs, etc., this section applies only to spot trading, not F&O.

Therefore remember,

• Section 115BBH = Spot Crypto Trades
• Section 73 (Speculative Business) = Crypto F&O Trades

Conclusion:

If you trade in Crypto Futures & Options (F&O), your activity is treated as a speculative business, because crypto exchanges are not recognised by Indian law. Losses from such trading are eligible to be carried forward for 4 years; however, they can only be adjusted against speculative income. The condition is, you must report these losses under the “Speculative Business” section of your Income Tax Return (ITR). Do not report losses under regular business or under crypto spot trading rules (Section 115BBH), as it will be considered incorrect.

Disclaimer:

This information is just for educational purposes. Tax situations can vary from person to person; therefore, it is always recommended to consult a qualified tax professional or chartered accountant (CA) before filing your Income Tax Return (ITR).