Crypto Trader? The 'No Set-Off' Rule. Why You Pay Tax Even on Net Losses

Crypto Trader? The 'No Set-Off' Rule.

If you trade Bitcoin, Ethereum, or any other Virtual Digital Asset (VDA) in India, you are walking through a taxation minefield in 2026.

Most investors know about the flat 30% Tax (plus 4% Cess). But many are unaware of the much more dangerous rule buried in Section 115BBH of the Income Tax Act: The ban on "Set-Off of Losses."

In the stock market, if you lose money on Tata Motors and make money on Reliance, you can combine them to lower your tax. In Crypto, the government says: "Heads I win, Tails you lose."

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1. The "No Set-Off" Nightmare Explained

The Income Tax Department treats every single winning trade as a separate taxable event, while completely ignoring your losing trades (except within the same pair/coin in some interpretations, but Inter-Coin set-off is strictly prohibited).

You cannot offset a loss in one coin against the profit in another coin. Not even in the same financial year.

💸 The Brutal Math Scenario

Imagine you made two trades this year:

• Trade A (Bitcoin): You made a Profit of ₹1,00,000.
• Trade B (Ethereum): You made a Loss of ₹1,00,000.

Your Net Profit: ₹0 (You broke even).

Stock Market Logic: Tax is ₹0 (because Net Profit is 0).

Crypto Tax Logic (Section 115BBH):

• Tax on Bitcoin Profit: 30% (+ Cess) on ₹1 Lakh = ₹31,200 Tax Due.
• Tax Relief on Ethereum Loss: ₹0 (Ignored).

Result: You earned ₹0 in reality, but you still have to pay ₹31,200 to the government from your own pocket.

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2. No Carry Forward of Losses

It gets worse. If you have a terrible year and lose ₹5 Lakhs overall, normally (in stocks or business) you could "carry forward" that loss to the next 8 years to reduce future taxes.

For Crypto: No Carry Forward.

Your loss dies on March 31st. You cannot use this year's loss to reduce next year's tax bill. The loss is simply dead money.

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3. The 1% TDS Trap (Liquidity Drain)

On top of the 30% tax, every time you sell a crypto asset (transfers exceeding ₹10,000 or ₹50,000 depending on filer status), the exchange deducts 1% TDS (Tax Deducted at Source) under Section 194S.

This 1% locks up your capital. While you can claim it back as a refund when filing your ITR if your total tax liability is lower, your trading capital effectively shrinks by 1% with every sell order, killing high-frequency trading strategies.

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4. Can I Deduct Mining Costs?

No.

The only deduction allowed is the "Cost of Acquisition" (the price you bought it at). You strictly cannot deduct business expenses such as:

• Electricity costs for mining.
• Graphic card (GPU) or Hardware costs.
• Trading software subscriptions or internet bills.

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The Odds Are Against You

The Indian tax structure is clearly designed to discourage active crypto trading.

If you are a trader, you must be extremely careful. You need a win rate significantly higher than 50% just to break even after tax. For many, switching to the Stock Market—where set-off is allowed and taxes are lower (12.5% LTCG / 20% STCG)—is the smarter financial move.

Disclaimer: This article is for informational purposes only and does not constitute tax advice. Crypto taxation rules in India (Section 115BBH, 194S) are complex and subject to change. Please consult with a Chartered Accountant (CA) specializing in VDA taxation before filing your taxes.