Crypto in computing is coming back? Here are the forms you need to know

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The 2022 budget dealt a blow to India’s booming cryptocurrency market, imposing a 30% tax on income or gains from such transactions. In addition, he also ordered cryptocurrency exchanges to withhold 1% TDS (withholding tax) from such transactions.

As a result, taxpayer compliance hassles have skyrocketed. If you have dabbled in crypto transactions, not only will you have to report any gains or income from them in the 2022-23 fiscal year on your tax returns, but detailed disclosure of all your transactions will have to be made in a separate VDA (virtual digital assets) schedule. This not only includes cryptocurrencies, but also non-fungible tokens (NFTs), says Avinash Polepally, Principal, CryptoTax Business Head, Cleartax.

Also Read: Moneycontrol’s Definitive ITR Deposit Guide for Fiscal Year 2022-23

Impact of Budget 2022 on Crypto Transactions

Budget announcements by Finance Minister Nirmala Sitharamans on February 1, 2022 have dulled the shine of cryptocurrencies in India. Globally, crypto exchanges have seen declining trading volumes as markets have turned bearish since mid-2022. In India, however, the drop was more pronounced due to the TDS which went into effect on July 1, 2022, explains Vimal Sagar Tiwari, Co-Founder and COO, CoinSwitch.

We have seen a steady decline in transaction volumes (~90%, YoY). Most users hedged their investments with stablecoins (which are backed by fiat currency, gold, etc.) and took a wait-and-do approach commonly seen among retail investors, says Shivam Thakral, CEO of BuyUcoin, a digital asset exchange.

Yet, closer scrutiny and compliance requirements have also had a positive impact. This change paved the way for increased institutional involvement as clearer tax guidelines instilled confidence and attracted traditional players to the crypto market, he adds.

Also Read: Will BlackRocks See Bitcoin ETF Breathe Life Into Comatose Crypto Market?

ITR-2 or 3?

If you are a salaried employee whose income is less than Rs 50 lakh, you will need to file returns using ITR-2, not ITR-1. That is, if you choose to treat crypto gains as capital gains. The taxpayer will have to decide whether to treat this as capital gains or as income. If you decide to treat crypto earnings as income, then ITR-3 is the right form for you, even if you have no other business income, says Mayank Mohanka, Partner, SM Mohanka and Associates.

Reporting capital gains on crypto trades is quite simple, the difference between your sale price and the cost of acquisition will count as capital gains and will be taxed at 30%.

If you’ve made losses, you can’t offset them against gains made when selling any other fixed assets, like mutual funds or even ARVs. Investors cannot offset the losses of one VDA against the gains of another. For example, if someone makes a profit on their bitcoin holdings but makes a loss on ethereum, they will have to pay taxes for the bitcoin gains, and cannot offset that against the losses they made on ethereum, says Polepally. However, you can claim the TDS withheld when filing your return.

For many Indian investors, the government has already collected 1% TDS. Filing your tax return is especially important if you’ve made losses, to get your tax refund, he adds.

Also listen: Tax Reporting: Wrong ITR Form, Misdisclosure of Crypto Earnings, Foreign Assets Could Get You Into a Soup | Just save

Crypto as business income

Calculating tax can be quite complicated when crypto income happens to be your business income, for example, if for services rendered you accept payment in the form of airdrops or NFTs.

Compliance standards around this involve two levels. First, you are part of the corporate income tax system because you get paid for your services, which means whoever pays you also has to worry about GST compliance. And your receipt of those payments must also comply with GST standards, says Indy Sarker, co-founder of TaxCryp, a crypto tax compliance firm.

Once you have received this crypto asset, you will need to determine the cost of acquisition in terms of the value of the services you have rendered. This is an area where there is some uncertainty, and tax advice is recommended, he adds.

Punit Agarwal, founder of crypto tax platform KoinX, says professionals accepting crypto as payment will have to pay tax on its market value upon receipt. The tax rate will be the one applicable to the business, he says.

Experts point out that the tax rules regarding the treatment of crypto receipts as business income are unclear. When professionals get crypto into their account, it should be treated as other income or business income, with a 30% tax on the same. If the crypto coins are held after the date of income and subsequently sold, the person is expected to report capital gains or losses depending on whether the sale price of the coin is higher or lower than the price of the coin on the date of income, Polepally says.

Airdrops involve sending tokens to individual wallets, either as a promotion or in exchange for a small favor. They are assumed to have zero cost and a 30% tax must be paid on the price at the time of sale. NFTs, on the other hand, are not fungible and it is difficult to determine their market price. If you made gains/losses on the sale of an NFT, you report the same and file taxes accordingly: 30% for the gains and nothing for the losses, Polepally explains.

A helping hand from crypto exchanges

Not only is the tax jolt for crypto enthusiasts difficult, but the reporting procedure is also difficult. This is why many cryptocurrency exchanges have tried to make the process easier for their customers. We have introduced detailed transaction history records, which provide investors with comprehensive data on their trading activities, says Jaideep Yadav, Founder of Kandle, a GameFi Company. In GameFi, users get paid in VDAs (crypto, NFT, etc.) to play games.

Coinswitch provides its users with TDS and detailed profit and loss reports for trades made during a fiscal year. Likewise, BuyUcoin users can access their transaction history, account statements, tax calculators, and download tax reports.

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