Crypto ITR Filing Checklist: 5 Things To Keep In Mind This Year
With an organised approach, investors can seamlessly navigate tax filings, stay compliant, and avoid unnecessary penalties, making financial management more efficient and stress-free.
Understanding how to file taxes is a crucial financial skill everyone should master as they start earning. However, since tax education is rarely covered in schools or colleges, many taxpayers find the process overwhelming. This challenge is even greater in emerging sectors like crypto, where taxation rules are relatively new, making it harder for investors to gather all the reporting requirements and avoid errors. Similar to stock market taxation, crypto taxes require a clear grasp of compliance, deductions, and potential penalties.
With the tax season approaching, here are key factors to consider when filing taxes on gains from Virtual Digital Assets (VDAs).
Choose the Right ITR Form
Selecting the correct ITR form is the first and most crucial step. In India, crypto income is categorised under ‘Income from Other Sources’ or ‘Capital Gains, ’ depending on the nature of the transactions. If you’re an individual investor making occasional crypto trades, you should file your returns using ITR-2 (which is also used for stock market capital gains).
On the other hand, if you trade crypto frequently or operate it as a business, you must use ITR-3, similar to active traders in the equity market. Filing under the wrong category can lead to scrutiny from the Income Tax Department, causing unnecessary delays or penalties.
Report Additional Crypto Income
Apart from trading, many investors earn crypto through staking rewards, airdrops and DeFi transactions. These income sources are taxed differently and must be reported separately under ‘income from other sources’. Staking rewards are treated like dividend income in the stock market and are taxed based on your applicable income slab. Airdrops, on the other hand, are considered gifts. If the total value of gifts received from non-relatives exceeds Rs 50,000 in a year, it is taxed at your income slab rate at the time of receipt.
For example, suppose you receive an airdrop of 200 tokens valued at Rs 40,000. Since this falls below the Rs 50,000 gift threshold, no immediate tax is applicable. However, if your total taxable gifts exceed Rs 50,000 in a year, this amount will be taxed based on your income slab. Later, if you sell these 200 tokens for Rs 70,000, the profit of Rs 30,000 (Rs 70,000 - Rs 40,000) will be subject to a flat 30 per cent crypto tax on capital gains, similar to profits from crypto trading.
Offsetting Losses
As per Section 115BBH, losses incurred in crypto cannot be offset against any income. This means that even if you face losses on some trades, you still need to pay 30 per cent tax on your profitable trades without any deductions for losses.
For example, if you make a Rs 1,00,000 profit on Bitcoin but incur a Rs 50,000 loss on Ethereum, you’ll still pay 30 per cent tax on the full Rs 1,00,000 profit since crypto losses cannot be set off. While this might seem restrictive, it encourages a more strategic approach to crypto investing, where investors focus on securing consistent gains rather than relying on loss adjustments. Additionally, understanding this rule helps investors plan their tax liabilities better and make informed decisions when booking profits.
TDS Deduction on Transactions
TDS (Tax Deducted at Source) ensures that crypto transactions are taxed at the time of execution. In India, a 1 per cent TDS applies to all crypto and NFT transactions above the specified threshold, effective July 1, 2022. When a buyer purchases crypto, they must deduct 1 per cent TDS from the payment and deposit it with the government, while the seller receives the remaining amount.
If the transaction occurs on an Indian exchange, the platform automatically deducts and deposits TDS, making compliance seamless. However, investors using foreign exchanges must deduct and file TDS manually. This system helps track crypto transactions efficiently while allowing traders to claim TDS deductions when filing their income tax returns.
Penalties for Non-Compliance
Proper tax reporting ensures smooth financial management and prevents hefty penalties, which can go up to 70 per cent of the tax due for non-disclosure. Additionally, timely deduction and deposit of the 1 per cent TDS on crypto transactions help investors avoid an interest charge of 1.5 per cent per month.
Ensuring compliance also eliminates the risk of severe consequences, such as legal action in cases of deliberate tax evasion. By accurately reporting crypto income and meeting tax obligations on time, one can have a smooth investment journey.
Filing taxes can often feel complex, whether you invest in equities, crypto, or other asset classes. However, maintaining proper documentation and structured record-keeping simplifies the process, ensuring accurate reporting of gains and losses. With an organised approach, investors can seamlessly navigate tax filings, stay compliant, and avoid unnecessary penalties, making financial management more efficient and stress-free.
(The author is the CEO and Co-founder of Mudrex, a global crypto investment platform)
Disclaimer: The opinions, beliefs, and views expressed by the various authors and forum participants on this website are personal and do not reflect the opinions, beliefs, and views of ABP Network Pvt. Ltd. Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. Cryptocurrency is not a legal tender and is subject to market risks. Readers are advised to seek expert advice and read offer document(s) along with related important literature on the subject carefully before making any kind of investment whatsoever. Cryptocurrency market predictions are speculative and any investment made shall be at the sole cost and risk of the readers.
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