How to Report Cryptocurrency Gains and Losses on the Income Tax Return
So under which heading should these transactions be reported, as each heading has its own calculation provisions, tax rates, loss netting and deferral provisions, reporting requirements, etc. ?
Although currently there are no specific guidelines / specific tax provisions on the taxation of cryptos in the Income Tax Act 1961 (the Act), one could draw conclusions from the general principles of taxation. and tax transactions according to the purpose for which they are used to report gains and losses on the income tax return (ITR).
It should be borne in mind that not reporting cryptocurrency transactions in your RTI can lead to criminal consequences, and in some cases there could be a risk of legal action.
Here is an overview of how one can report crypto transactions in his ITR.
Declaration of cryptocurrency transactions
A taxpayer should report cryptocurrency-related transactions as business income if they are held as trading stocks, or as capital gains if they are held as investments. If it is reported as business income, the ITR-3 form will apply to an individual in the 2020-2021 fiscal year, while if it is reported as a capital gain from an investment, the individual will need to use RTI-2.
Taxation of business income / capital gains
- Taxability as capital gains: If cryptos are held as investments, then it could be argued that the profit / loss on such a sale should be reported as capital gains / losses. If the cryptos are held for more than 36 months, the gain on them could be classified as long-term capital gain and be subject to 20% tax, plus applicable surtax and tax. Otherwise, they could be classified as short-term capital gains, taxable at the applicable personal tax rates. For long-term capital gains, an indexation benefit could be used to increase the cost due to inflation.
- Taxability as business income: If cryptos are held as trading stocks, then they could be taxed under the main income of the business. Income (net of expenses such as cost of buying cryptos, depreciation of computers / laptops, salary, rental fees, account maintenance fees, etc.) from such trading activity could be taxed as business income. As mentioned above, for individuals with business income, the prescribed RTI form, i.e.RTI-3, should be used (in which case, accounts should be verified after crossing the threshold. specified). Business income is taxed at the prevailing slab rates (assuming a non-presumptive tax base), plus the applicable surtax and tax.
How to report in ITR-2 / ITR-3
If cryptos are treated as an investment, long-term capital gains on the sale of cryptos should be reported under Table CG of ITR -2 / ITR-3 (if there are sources of corporate income ), they will be reported under “From the sale of assets where B1 to B8 / B9 above are not applicable” for fiscal year 2020-21.
Short-term capital gains on the sale of cryptos should be reported in Table CG of ITR-2 / ITR-3 for fiscal year 2020-21, under “STCG on assets other than A1 or A2 or A3 or A4 or A5 above “. In addition, the tax return must be filed before the due date to request the carry forward of capital losses, if any, for offsetting over the next 8 years with capital gains.
On the other hand, if it is treated as business income, the sale of cryptos should be reported in Part A – Trading Account under “Sale of Commodities” in ITR-3. Net profit / loss from the sale of crypto after reduction of allowable spending should be reported under “Net Profit Before Tax”.
For losses incurred in cryptocurrency transactions, the tax return must be filed by the due date (July 31 of the year following the tax year, for an individual without any verification requirement, and October 31 following the tax year, if the individual is subject to a tax audit). For fiscal year 2020-2021, the aforementioned extended maturity dates are December 31, 2021 and February 15, 2022, respectively. If this is not a speculative loss, this loss could be carried forward for 8 years. ‘valuation (“AA”) and deducted from business income.
Declaration of cryptocurrency holdings in ITR
If a person is considered resident and ordinary resident, it is mandatory to report foreign assets according to Annex FA, “Details of Foreign Assets and Income from Any Source Outside India” regardless of the income in the tax return.
However, keep in mind that there are no clear guidelines from the tax authorities on whether cryptos should be considered a foreign asset. Since cryptos are digital assets, the location of the server and the law of the country under which protection is sought could be treated as the location of those assets. If it is determined that the cryptos are located outside of India, then they should be reported in Annex FA of the RTI.
Additional reporting obligation in the ITR
In addition, if the individual’s net taxable income exceeds Rs 50 lakh, Annex AL of the ITR form must also be completed. This calendar requires an individual to declare their real estate, jewelry, bullion, etc., archaeological collections, drawings, paintings, sculptures or any work of art, vehicles, yachts, boats and airplanes, financial assets like bank balances, including deposits, stocks and securities, insurance policies, loans and advances made and cash on hand. In addition, any liability relating to these assets should also be reported, such as a mortgage taken out for the purchase of a house, etc. Currently, there is no guidance on the obligation to report cryptos in Annex AL of the currently notified ITR forms.
Criminal consequences for non-declaration of crypto-currencies in ITR
It should be noted that the non-declaration / non-disclosure of these transactions could have various penal consequences. Some of the criminal consequences are:
a) If foreign assets / income are not declared in table FA (mandatory for each person holding foreign assets, regardless of income), this could be the subject of a tax notice until 17 years under the law.
b) In addition, it may also lead to various criminal consequences under the Black Money Law (Undisclosed Foreign Income and Assets) and Tax Imposition of 2015. Some of them are:
i) A penalty of Rs10 lakh under the provisions of the Black Money Act.
ii) In addition, undisclosed foreign income or assets will be taxed at the flat rate of 30 percent. No exoneration, deduction or set-off of carry-over losses which may be eligible under the current Income Tax Act 1961 is permitted.
iii) The penalty for non-disclosure of income or asset located outside India will be three times the amount of tax payable thereon. This is in addition to the tax payable at 30%.
iv) In addition, there is a risk of prosecution.
Therefore, it is imperative that individuals make proper statements / disclosures in the tax returns they file and pay appropriate taxes on those transactions when that income is earned. Given the widespread use of cryptos and in the absence of guidelines on crypto taxation, the government should consider issuing the necessary guidelines on crypto taxation and reporting requirements.
(Homi Mistry is a partner of Deloitte India. With contributions from Ajay Nahata, Senior Director at Deloitte Haskins & Sells LLP)