Cryptocurrencies, as a fast-growing and innovative segment of the financial landscape, bring new challenges and ambiguities to tax regulations around the world. In India, this is no different. This article aims to give you a comprehensive understanding of India's tax implications regarding cryptocurrencies or virtual digital assets (VDAs) and whether you need to report cryptocurrency income when filing Income Tax Returns (ITRs).
Understanding the taxation of cryptocurrencies in India
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 the income from cryptocurrency sales is considered taxable and must be declared in the ITR.
There are various tax treatments for cryptocurrency transactions depending on the nature of the transaction. Income from cryptocurrencies could be classified as capital gains or trading income depending on whether it is held for trading or investment purposes. According to tax research and advisory firm Taxmann, you must report such income in the '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 benefits of indexing. If trading cryptocurrencies, the income can be treated as trading income, allowing losses to be carried forward.
The 2022-23 Budget clarified the income tax lien on crypto assets, subjecting them to a 30 percent tax plus taxes and surcharges. It also proposed a tax deducted at source (TDS) of 1 percent on payments exceeding Rs 10,000 per year and taxation of crypto gifts held by recipients.
Cryptocurrency reports in ITR
The classification of cryptocurrency holdings as Indian or foreign assets remains a point of uncertainty. Under current tax laws, individuals are required to declare all assets abroad, regardless of their income level. Given this ambiguity, experts recommend reporting cryptocurrency holdings to avoid potential penalties, especially for people with taxable income above Rs 50 lakhs.
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 expiration date to present your ITR depends on the item under which you report this income, Taxmann explained. If you report the income as capital gains, the due date to file the ITR will be July 31. If you report income as business income, you must calculate billing to determine if you should audit your accounts. If your billing exceeds the specified limit, you will need to have your accounts audited, and in that case, the deadline to submit your ITR will be October 31. However, if your billing is less than the specified limit, the deadline to file your ITR will be July 31.
What is a virtual digital asset (VDA) and where is it reported on the ITR 2 form?
A virtual digital asset (VDA) is a digital representation of value that can be traded or transferred digitally 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).
According to the Indian Department of Income Taxation, any income from the transfer of these Virtual Digital Assets is deemed taxable. In the ITR 2 form, taxpayers can declare their VDA income in the 'VDA Schedule'. This schedule is designed specifically for reporting VDA transfer income, and is applicable to both residents and non-residents. To correctly report income, taxpayers must specify whether the VDA income falls under the 'Capital Gains' or 'Other Source Income' category.
