Cryptocurrencies, as an innovative and fast-growing segment of the financial landscape, bring new challenges and ambiguities to tax regulations worldwide. In India, this is no different. This article aims to provide you with a comprehensive understanding of the Indian tax implications concerning cryptocurrencies or Virtual Digital Assets (VDAs) and whether you need to report cryptocurrency income while filing Income Tax Returns (ITR).
Understanding cryptocurrency taxation in India
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Cryptocurrency taxation in India is currently in a state of flux as the government seeks to regulate this rapidly evolving market. However, the basic principle remains that income from cryptocurrency sales is considered taxable and should be reported in the ITR.
There are various tax treatments for cryptocurrency transactions based on the nature of the transaction. Cryptocurrency income could be categorised as capital gains or business income based on whether it’s held for investment or trading purposes. According to tax research and advisory firm Taxmann, you should report such income in ‘Schedule VDA’ in ITR-2 or ITR-3. ITR-1 or ITR-4 cannot be used to report this income.
The general rule suggests that short-term capital gains are taxed according to the taxpayer’s slab rates, while long-term capital gains are subject to a 20 percent tax rate with indexation benefits. If cryptocurrency is traded, the income can be treated as business income, allowing for the carry-forward of losses.
The 2022-23 Budget clarified the income tax levy on crypto assets, subjecting them to a 30 percent tax plus cess and surcharges. It also proposed a 1 percent Tax Deducted at Source (TDS) on payments exceeding Rs 10,000 per year and taxation of crypto gifts in the hands of recipients.
Reporting cryptocurrency in ITR
The classification of cryptocurrency holdings as Indian or foreign assets remains a point of uncertainty. As per current tax laws, individuals are obliged to report all foreign assets, irrespective of their income level. Given this ambiguity, experts recommend reporting cryptocurrency holdings to avoid potential penalties, especially for individuals with taxable income exceeding Rs 50 lakh.
The tax department has introduced a new ‘Schedule VDA’ section in the ITR forms for taxpayers to report their Virtual Digital Assets (VDA). This includes not only cryptocurrencies but also digital units, tokens, etc., issued on a blockchain or similar Distributed Ledger Technology (DLT).
The due date for filing your ITR depends on the head under which you report this income, explained Taxmann. If you report the income as capital gains, your due date for filing the ITR will be July 31. If you report the income as business income, you need to compute the turnover to determine whether you must get your accounts audited. If your turnover exceeds the specified limit, you must have your accounts audited, and in that case, the due date for filing your ITR will be 31st October. However, if your turnover is below the specified limit, the due date for filing your ITR will be 31st July.
What is a Virtual Digital Asset (VDA) and where is it reported in ITR Form 2?
A Virtual Digital Asset (VDA) is a digital representation of value that can be digitally traded or transferred and used for payment or investment purposes. Cryptocurrencies like Bitcoin, Ethereum, and Ripple are common examples of VDAs. However, VDAs also include other forms of digital assets, such as tokens or units issued on a blockchain or similar Distributed Ledger Technology (DLT).
As per the Income Tax Department of India, any income from the transfer of these Virtual Digital Assets is considered taxable. In ITR Form 2, taxpayers can report their VDA income under ‘Schedule VDA’. This schedule is specifically designed for reporting income from the transfer of VDAs, and it’s applicable to both residents and non-residents. To correctly report income, taxpayers need to specify whether the VDA income falls under the category of ‘Capital Gains’ or ‘Income from Other Sources’.
