Decoding crypto reporting requirements in new income tax return forms

The government has finally, via the Finance Act of 2022, included taxation of cryptocurrencies or virtual digital assets (VDA) in the Income Tax Act and laid out some key aspects around how much tax one has to pay on the gains, whether losses can be set off and which expenses to claim as deduction from gains arising from the sale of cryptocurrencies.

This is the first time taxpayers will be reporting income from sale of crypto assets in their income tax return (ITR) forms. Naturally, some changes in the forms were included for filing for FY2022-23 (AY2023-24). Towards this end, a separate Schedule VDA has been inserted in ITR-2 for reporting Income from VDA. In Schedule CG (capital gains) Table F, a quarterly breakup of the VDA income is also required. This means crypto gains will set off advance tax provisions and taxpayers who have not included crypto income while paying advance tax, might end up seeing some penal interest.

Under section 115BBH, the tax rate for gains from VDAs is 30%, similar to how lottery income is taxed, neither treating them as capital gains nor as business income. Yet, the reporting for VDA has been captured under the schedule CG.

Interestingly, Schedule VDA in the case of ITR-3 has a choice between two heads of income drop down, so a user can choose to either report the income as capital gains income or as business and professional income. Also, as per the new section, purchase cost of VDA is allowed to be deducted and the net gain shall be taxed at 30% (additional cess and surcharge as applicable). No other costs shall be allowed to be deducted.

A key concern of taxpayers has been around treatment of losses from the sale of cryptocurrencies. But, it appears that losses cannot be set off. A certain clarification was made upon a question raised in parliament, where this has been interpreted as ‘loss within the same currency can be set off, however, loss across currencies cannot be’. This is the interpretation most experts have adopted in the absence of full clarity. What this means is that loss from sale of bitcoins can be set off from gain from sale of bitcoins, loss from sale of ethereum can be set off from gain from sale of ethereum, however, loss from bitcoin cannot be set off from gain from ethereum and vice versa. However, the ITR forms have not been designed for reporting in this fashion.

Where and if a loss set-off is done (within the same cryptocurrency), the reporting in the forms does not foresee a situation where the taxpayer may have multiple accounts, held with different exchanges, where a loss set-off scenario may arise.

As part of a campaign to drive up the collection of advance tax for FY 22-23, the income tax department sent an intimation via SMS and email to all taxpayers who have transacted in shares/securities, cryptocurrency and for cases where the tax deducted at source (TDS) credit was not sufficient to meet the tax liability for the income earned by such taxpayers.

The department seems to have analysed data on income, TDS and taxes from form 26AS, and accordingly sent out the communication to those sections of taxpayers who have defaulted in payment of advance tax or have made a short payment of tax.

The implication; if the taxpayer does not report crypto transactions in the ITR for FY22-23, there is a high chance that the return will be processed with a tax due and the return will be selected for scrutiny.

If the taxpayer has not paid adequate advance tax during FY22-23, then interest under sections 234C & 234B at the rate of 1% per month on the amount of tax shortfall will be auto-applied in the tax return and the same should be paid in full at the time of submission of the ITR. If the taxpayer does not pay this interest, then the tax department will send a demand letter for the same when the return is processed.

Many other aspects need to be addressed. For instance, if crypto income is reported as business income, should the taxpayer comply with the existing tax audit provision and if yes, how should the taxpayer calculate the turnover in the case of crypto derivatives. These are some aspects for which different experts may take a different approach, given the absence of instructions.

As crypto currencies continue to evolve, they will fuel many questions and concerns about taxation.

Archit Gupta is founder and CEO, Clear