How to Account for Crypto Holdings and Report Them in Your Income Tax Return (ITR) in India

With the increasing regulation of cryptocurrencies under India’s taxation framework, accounting for crypto holdings and reporting them in your Income Tax Return (ITR) has become crucial. As per the Finance Act 2022, specific tax rules apply to cryptocurrencies and Virtual Digital Assets (VDAs). This guide will help you understand how to report crypto transactions in compliance with the Income Tax Act.

1. Taxation on Crypto Transactions

India has introduced stringent cryptocurrency tax rules that include:

• Profits from Sale of Crypto (Capital Gains or Income): Any profit made from the sale of cryptocurrencies is taxed at a flat rate of 30% (plus surcharge and cess). This applies to both short-term and long-term gains.
• No Set-Off of Losses: Losses incurred from selling one cryptocurrency cannot be offset against profits from another or any other income. Additionally, these losses cannot be carried forward to the next financial year.
• TDS on Crypto Transfers: A 1% TDS (Tax Deducted at Source) is applicable on crypto transfers exceeding ₹50,000 for specified persons (or ₹10,000 for others), effective July 1, 2022. This TDS applies to all exchanges facilitating crypto trade.

2. Accounting for Crypto Holdings

How you account for your crypto holdings depends on whether they are treated as capital assets or inventory:

As Capital Assets (For Investors)

If you hold cryptocurrencies as investments, they are treated as capital assets. Upon sale, capital gains or losses are incurred.

• Cost of Acquisition: This includes the purchase price and any expenses directly related to the acquisition of the cryptocurrency.
• Valuation: At the end of the financial year, crypto holdings can be recorded at cost or market value, but taxation occurs only on sale or transfer.

As Inventory (For Traders)

For active traders, cryptocurrencies are accounted for as inventory.

• Revenue from crypto sales is considered business income, but profits from each transaction are still taxed at 30%.

3. Reporting in Income Tax Return (ITR)

Sale of Crypto (Profits)

Profits from the sale or transfer of cryptocurrencies must be reported under “Income from Other Sources” in your ITR, where they are taxed at 30%.

Sale of Crypto (Losses)

Losses from cryptocurrency sales cannot be set off against other income or carried forward.

TDS Compliance

Ensure that TDS deducted on crypto transfers is reflected in Form 26AS and included when filing your ITR.

Crypto Held as Capital Asset

If you hold cryptocurrencies as a capital asset and no sale occurred, reporting is not mandatory. However, voluntary disclosure can be made under Schedule EI (Exempt Income).

4. Example for Reporting

1. Investor Example: A buys Bitcoin worth ₹2 lakhs in FY 2023-24 and sells it for ₹4 lakhs in the same year. The profit of ₹2 lakhs is reported under “Income from Other Sources” and taxed at 30%, resulting in a tax liability of ₹60,000 plus cess and surcharge.
2. Trader Example: B regularly buys and sells cryptocurrencies, treating them as inventory. Each transaction’s profit is reported as business income and taxed at 30%.

5. Key Compliance Points

• Maintain Detailed Records: Keep records of all crypto transactions, including purchase dates, costs, and selling prices.
• TDS Certificates: Ensure TDS on crypto transfers is reflected in Form 26AS or obtain the relevant TDS certificates.
• Foreign Crypto Exchanges: If using foreign exchanges, comply with the Foreign Exchange Management Act (FEMA) and RBI guidelines.

Key Income Tax Sections

• Section 115BBH: Governs the taxation of Virtual Digital Assets (VDAs), including cryptocurrencies, at a flat rate of 30%.
• Section 194S: Introduces 1% TDS on VDA transfers exceeding ₹50,000 or ₹10,000.

With the regulatory environment constantly evolving, staying updated on crypto taxation is essential. If you need help with specific transactions or crypto holdings, feel free to reach out for professional guidance.