Crypto Transactions in ITR: Essential Disclosure Requirements for Virtual Digital Asset Investors

Tax Department Tightens Noose on Cryptocurrency Transactions in India

As cryptocurrencies and other virtual digital assets (VDAs) gain popularity among Indian investors, the Income Tax Department has strengthened disclosure and compliance rules around crypto transactions. Incorrect disclosure, mismatch in TDS details, or failure to report crypto income can lead to notices, penalties, and tax demands, making proper reporting and reconciliation essential for VDA investors and traders.

Classification of Cryptocurrencies

Under the Income Tax Act, cryptocurrencies and NFTs are classified as "Virtual Digital Assets (VDAs)." To define this category, Section 2(47A) was introduced in the Act. This section broadly covers any information, code, number, or token generated through cryptographic means, excluding Indian and foreign fiat currencies. Popular cryptocurrencies include Bitcoin, Ethereum, Litecoin, Dogecoin, Ripple, and Polygon.

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Taxation of Virtual Digital Assets

Income arising from the transfer of Virtual Digital Assets is taxed at a flat 30 percent under Section 115BBH of the Income Tax Act, 1961, along with applicable surcharge and cess. This taxation framework operates separately from the normal slab-rate system and applies specifically to gains from VDA transfers. Additionally, Section 194S of the Income-tax Act, 1961, mandates a 1 percent TDS on specified VDA transfers. This TDS is not an additional levy, but a tax credit that can generally be claimed while filing the return.

Compliance Challenges

Taxpayers face significant compliance challenges, particularly when it comes to loss adjustment. Losses arising from VDA transactions cannot be set off against other income heads (not even other crypto income), nor can they typically be adjusted in the same manner as conventional capital losses. Taxpayers should therefore avoid assuming that crypto losses can reduce salary, business, or other taxable income.

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Disclosing TDS in ITR

According to reports, 6.45 lakh individuals were subjected to TDS on crypto transactions in FY23, but only 1.39 lakh disclosed such income in their returns. This leads to a question: what happens when one does not disclose crypto TDS in ITR? Tax experts suggest that crypto traders should report crypto TDS in ITR. If crypto TDS is not disclosed in the Income Tax Return, it can create a mismatch between the tax deducted and the income reported, which may trigger a notice from the Income Tax Department.

Key Disclosure Requirements

Taxpayers must ensure complete and accurate disclosure of all VDA transactions in their income tax returns, including details such as date of acquisition and transfer, sale consideration, cost of acquisition, and resulting gains or income. It is equally important to reconcile TDS deducted on crypto transactions with Form 26AS and AIS, as exchange-level reporting is increasingly under the scrutiny of the tax department.

Choosing the Right ITR Form

The choice of ITR form depends largely on the nature and frequency of crypto activity. Where crypto is held primarily as an investment, taxpayers can report such income in ITR-2. However, where transactions are frequent and resemble systematic trading activity, ITR-3 is more appropriate, as the income may be treated as business income. The key principle is that investor-style activity and trader-style activity should not be mixed. The reporting position, supporting documentation, and ITR selection should align with the actual nature of the transactions.