With the advent of the Union Budget 2022, a comprehensive taxation framework was introduced to address income derived from Virtual Digital Assets (VDAs), encompassing cryptocurrencies and NFTs. In alignment with this development, the Central Board of Direct Taxes (CBDT) has released the assessment year 2023-2024 ITR forms, incorporating Schedule VDA. This schedule encompasses the necessary disclosure requirements about transactions involving the transfer of VDAs.

Tax Framework for Virtual Digital Assets

Following the latest tax regulations, the income generated from the sale of Virtual Digital Assets (VDAs) (cryptocurrencies & NFTs) during the fiscal year 2022-23 will be subject to a tax rate of 30%, along with the applicable surcharge and cess. It is essential to emphasize that deductions for expenses other than the acquisition cost are not permissible when calculating such income.

Let’s consider an example to illustrate the calculation of taxable income under the new tax rules. Assume you purchased Bitcoin in FY 2018-19 for Rs 10,000 and sold them in FY 2022-23 for Rs 50,000. During the sale, you incurred expenses of brokerage for Rs 5,000. When determining the taxable income to be reported in the ITR form, Section 115BBH permits the deduction of only the cost of acquisition (Rs 10,000 in this case) from the Sale proceeds. Hence, based on this example, you would be required to report an income of Rs 40,000 (Rs 50,000 – Rs 10,000). Such profit of Rs 40,000 will be subject to a flat 30% tax which amounts to Rs 12,000.

It is pertinent to note that any loss arising from the sale of VDAs must be reported in ITR form. However, Section 115BBH prohibits any set-off and carry forward of losses arising from the sale of VDAs.

Crypto Gains are taxable under which head of income?

Income from VDA can be subject to taxation under either the head of Business Income or Capital Gains. When reporting such income in Schedule VDA, selecting the appropriate head under which it is offered for taxation is crucial.

Income from VDA  – Taxed as Business Income

Where an individual holds VDAs for sale in the regular course of business, the profits from such transactions should be taxed as Business Income. This particularly applies to individuals actively trading in cryptocurrencies or engaging in VDA-related business activities.

For example: An entity involved in the mining of cryptocurrencies and NFTs will include all gains from such activity in their Business Income, and it will be taxed accordingly.

Income from VDA – Taxed as Capital Gains

In contrast, if VDAs are held as capital assets, similar to equity shares or mutual funds, the income generated will be subject to taxation under the category of “Capital Gains.” This scenario typically applies when individuals hold VDAs as long-term investments rather than actively participating in trading or business activities. However, it is important to note that the benefit of indexation is not available as the period of holding VDA before sale is immaterial as the rate of tax is constant in all cases.

Which ITR form is to be used to report income from VDAs?

Choosing the correct ITR form is crucial and depends on the specific category under which you intend to declare your income for taxation. If you decide to report it as Capital Gains, you can disclose it using ITR-2. Alternatively, if you choose to report it as Business Income, you can utilize form ITR-3.

It is important to note that you can not use ITR-1 and ITR-4 for reporting income from VDAs.

How to report income from VDA in ITR form?

Any income generated from the sale of VDAs must be reported in ‘Schedule VDA’ in the ITR form (ITR-2 or ITR-3, as applicable). Schedule VDA requires details such as the acquisition date, sale date, category of income for taxation (Capital Gains or Business Income), acquisition cost, and money earned from selling VDA.

Let us analyze the Schedule VDA:

For example, Mr. A sold cryptocurrency of Rs 20 lakh on February 25, 2023. He initially acquired this cryptocurrency on October 1, 2021, for a sum of Rs 17 lakh. When reporting this transaction as Capital Gains in the ITR, the income should be reported as follows in ‘Schedule VDA:

If the VDA is received as a gift that was exempt in the hands of the recipient, the cost for which the previous owner acquired it shall be treated as the cost of acquisition. However, if the value of the VDA is charged to tax in the hands of the recipient under section 56(2)(x) at the time of receipt thereof, then such value shall be considered as the cost of acquisition.

It is important to highlight that if a taxpayer declares cryptocurrency income under the business category, the acquisition cost will be determined based on the Fair Market Value (FMV) of the cryptocurrency received on the date of receipt. This income will be subject to taxation under the business category. However, when the cryptocurrency is sold at a later date, any gains made from the sale will be taxable at a rate of 30% under the Capital Gains category.

What is the due date to file ITR?

If you earn income only from cryptocurrencies, the due date for filing your ITR depends on the head under which you report this income. When reporting income from the sale of virtual digital assets in ‘Schedule VDA’, you need to select whether it falls under the category of Business Income or Capital Gains. 

Capital Gains

If you report the income as Capital Gains, your due date for filing the ITR will be July 31.

Business Income

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 October 31. Also, you must submit the audit report to the income tax department by September 30. 

However, if the turnover of the business is below the specified limit of audit then the due date of filing ITR will be July 31.

In conclusion, Schedule VDA introduced by CBDT plays a pivotal role in ensuring accurate reporting of Virtual Digital Assets (VDAs) transactions. Every detail matters, as even a minor error can have significant consequences, such as a Notice of Defective ITR. With crucial information regarding TDS deductions and other vital details, compliance with Schedule VDA becomes essential for taxpayers. 

Simplify the process and avoid potential errors by utilizing the expert services of TaxNodes, your trusted tax platform, for ITR filing and precise completion of the Schedule VDA.