Decoding crypto reporting requirements in new tax return forms

The government has finally, through the 2022 finance law, included the taxation of cryptocurrencies or virtual digital assets (VDAs) in the income tax law and has defined some key aspects regarding the amount of tax to be paid out of winnings, whether losses can be set off, and what expenses to claim as a deduction from winnings from the sale of cryptocurrencies.

This is the first time that taxpayers will report income from the sale of crypto assets in their tax return (ITR) forms. Naturally, some changes in forms have been included for filing for FY2022-23 (AY2023-24). To this end, a separate VDA schedule has been inserted into ITR-2 to report VDA revenue. In Table F of Schedule CG (Capital Gains), a quarterly ARV income breakdown is also required. This means that crypto earnings will trigger early tax provisions and taxpayers who failed to include crypto earnings when paying advance tax could end up seeing criminal interest.

Under Section 115BBH, the tax rate on gains from ARVs is 30%, similar to how lottery earnings are taxed, without treating them as capital gains or business income . Still, the reports for VDA have been captured under the CG schedule.

Interestingly, Schedule VDA in the case of ITR-3 has a choice of two income heads drop down, so a user can choose to report the income as capital gains income or as business income and professional. Additionally, under the new section, the cost of purchasing the VDA can be deducted and the net gain will be taxed at 30% (additional termination and surcharge, if applicable). No other costs may be deducted.

One of the main concerns of taxpayers is the treatment of losses resulting from the sale of cryptocurrencies. But, it seems that the losses cannot be compensated. Some clarification was provided on a matter raised in Parliament, where this was interpreted as “loss in the same currency can be offset, but loss between currencies cannot”. This is the interpretation that most experts have adopted in the absence of any clarity. This means that the loss from selling bitcoins can be offset by the gain from selling bitcoins, the loss from selling ethereum can be offset by the gain from selling ethereum, however, the loss of bitcoin does not cannot be offset by ethereum gain and vice versa. However, RTI forms were not designed to report this way.

When and if loss compensation is performed (within the same cryptocurrency), the statement in the forms does not provide for a situation where the taxpayer may have multiple accounts, held at different exchanges, where a compensation scenario loss may occur.

As part of a campaign to increase collection of withholding tax for FY22-23, the Income Tax Department sent a text and email notification to all taxpayers who made transactions in shares/securities, cryptocurrency and for cases where the tax deducted at source tax credit (TDS) was not sufficient to meet the tax payable for the income earned by these taxpayers .

The department appears to have analyzed income, TDS, and tax data from Form 26AS, and accordingly sent the communication to sections of taxpayers who defaulted on withholding tax or made a short tax payment. .

involvement; if the taxpayer does not report crypto transactions in the ITR for fiscal year 22-23, there is a good chance that the report will be processed with tax due and the report will be selected for review.

If the taxpayer has not paid adequate withholding tax in fiscal year 22-23, interest under Sections 234C and 234B at the rate of 1% per month on the amount of tax shortfall will be automatically applied in the tax return and the same will have to be paid. in full at the time of ITR submission. If the taxpayer does not pay this interest, the tax authorities will send a formal notice to this effect when processing the declaration.

Many other aspects need to be addressed. For example, if crypto income is reported as business income, does the taxpayer have to comply with the existing tax audit provision and, if so, how does the taxpayer have to calculate the turnover in the case of cryptographic derivatives. These are some aspects where different experts may take a different approach, given the lack of instructions.

As cryptocurrencies continue to evolve, they will fuel many tax questions and concerns.

Archit Gupta is founder and CEO of Clear

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