ITR Filing FY24: Do you have income from cryptocurrencies, NFTs, virtual digital assets? How to show it in ITR form

With the income tax filing season coming to a close on July 31, 2024, for filing income tax returns for the 2023-24 tax year, taxpayers are eager to understand how to report income from digital assets. The Income Tax Act has established a “flat rate” for taxing income from virtual digital assets (VDAs) as cryptocurrencies, non-fungible tokens (NFTs) and others notified by the government VDAs.
New tax rules for VDA incomeIncome generated from sale of VDAs in FY 2023-24 will be subject to a tax rate of 30% and applicable surcharge and cess. It is important to note that losses incurred on one VDA cannot be set off against the profit arising on transfer of another VDA. Further, you cannot claim deductions for expenses other than acquisition cost while computing income from transfer of VDA.

For example, you purchased bitcoins in FY 2018-19 for Rs 10,000 and sold them in FY 2023-24 for Rs 50,000; and incurred expenses like brokerage and transaction charges of Rs 5,000 on the sale of bitcoins. You need to calculate the taxable income and report it in the ITR form. Taxpayers can deduct only the cost of acquisition (Rs 10,000 in the example) to arrive at the profit. Therefore, you will report an income of Rs 40,000 (Rs 50,000 minus Rs 10,000) in your ITR form. Hence, deductions related to brokerage and transaction charges are disallowed.

The income computed from the sale of VDA will be subject to tax at a flat rate of 30% without the benefit of maximum exemption limit. Further, no tax deduction like Sections 80C, 80D will be allowed from the income computed under this provision. However, a resident individual can claim the benefit of a rebate under Section 87A, up to Rs 12,500, from the tax computed under this provision if the total income of such individual is not more than Rs 5 lakh.

If a taxpayer has opted for the new tax regime, deduction under Section 87A is not allowed on income arising from sale of VDA even if the total income is up to Rs 7 lakh. Many professional bodies have filed a representation before the Central Board of Direct Taxes (CBDT) against this treatment and requested that the civil services be modified to allow relief against tax payable on special income.

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Any loss arising from sale of VDAs must also be reported in the ITR form. However, such loss cannot be carried forward or offset against other income (like salary, interest income, etc.).

Taxable under which income heading
VDA income may be subject to taxation under business income or capital gains. When reporting such income on Schedule VDA, it is crucial to select the appropriate head under which it is offered for taxation.VDA income taxed as business income: When an individual holds VDAs in the ordinary course of business, the profits from these transactions must be taxed as business income. This particularly applies to individuals who actively trade cryptocurrencies or engage in VDA-related business activities.

VDA income taxed as capital gains: If VDAs are held as capital assets (such as equity shares, mutual funds, etc.), the income generated will be taxed under the head of capital gains. This is applicable when individuals hold VDAs as long-term investments or personal holdings rather than actively engaging in trade or business activities. However, the benefit of indexation will not be allowed on the sale of VDAs even if they were held as long-term capital assets.

Therefore, depending on the nature of the VDA property and its purpose (trading or investment), the income will be categorized and taxed appropriately under the head of business income (PGBP) or capital gains.

Although the tax rates are the same under the head of business or profession or capital gains, this classification is essential for calculating interest under Section 234C. This section is applicable for penal interest in case of delayed advance tax payments.

When a shortfall in payment of advance tax arises due to underestimation or failure to estimate the accumulation of capital gains, then such shortfall shall be ignored while computing interest under Section 234C. In other words, taxpayers get immunity from interest for deferral of advance tax if the income from VDAs is offered for taxation as capital gains. However, if the assessee has disclosed the income from sale of VDA as business income, interest under Section 234C shall be charged if the assessee was liable to pay advance tax but fails to pay the same or the amount paid in each installment is less than the amount he should have paid in such installments.

Which ITR form should be used to declare VDA income?
Selecting the appropriate ITR form will depend on the specific head under which you are choosing to declare this income for taxation purposes. If you are reporting it as capital gains, you can disclose it in ITR-2. On the other hand, if you are reporting it as business income, you can use ITR-3 form. It is important to note that you cannot use ITR-1 or ITR-4 to report such income.

How to declare VDA income in the ITR form?
Any income generated from sale of VDAs must be reported under “Schedule VDA” in the ITR form (ITR-2 or ITR-3, as applicable). Schedule VDA requires details such as the date of acquisition, date of sale, category of income for taxation (capital gains or business income), cost of acquisition and income earned from sale of VDA.

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

For example: Mr. A sold Rs 20 lakh worth of cryptocurrency on February 28, 2024. He acquired this cryptocurrency on October 1, 2021 for Rs 17 lakh. While reporting this transaction as capital gains in ITR, the income should be reported in Schedule VDA in ITR-2 as follows.

When VDAs are sold, tax is deducted at 1% under Section 194S. Taxpayers are required to provide information regarding tax deducted on VDA sales under “TDS Schedule” in the ITR form. Please note that this information is usually auto-populated in the ITR form. However, it is advisable to cross-check this information to ensure that the correct information is entered in the ITR form.
What is the deadline for filing the ITR?
If you earn income solely 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 under Schedule VDA, you need to select whether it falls under the category of business income or capital gains.

Here’s how the due date is determined based on the category you choose:

Capital gains: If you declare the income as capital gains, your due date for filing ITR will be July 31.
Business Income: If you report your income as business income, you will need to calculate your turnover to determine whether you need to audit your accounts. If your turnover exceeds the specified threshold, you will need to audit your accounts, in which case the due date for filing your ITR will be October 31. Also, you will need to submit the audit report to the income tax department by September 30. However, if your turnover is below the specified threshold, the due date for filing your ITR will be July 31.

(Naveen Wadhwa is Vice President of Taxmann. Tarun Kumar Madaan is a Chartered Accountant.)

(Disclaimer: The opinions expressed in this column are those of the writer. The facts and opinions expressed herein do not reflect the views of www.economictimes.com.)

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