Virtual Digital Assets (VDAs), or cryptocurrencies, are digital assets that can be used to make payments for goods and services in online marketplaces. Crypto traders aim to make substantial profits by capitalising on the increase in the value of the cryptocurrencies they invest in. However, the high profitability of cryptocurrencies comes with significant risk due to their inherent volatility and the potential for significant capital losses.

Cryptocurrencies function as digital currencies similar to traditional money for purchasing goods and services. Nonetheless, the decentralised nature of cryptocurrencies, operating without intermediaries like banks or central authorities, has sparked controversy since their inception.

TAXATION ON VDA

Any income from the transfer of Virtual Digital Assets (VDAs) will be subject to a 30% tax rate. This tax applies to assets like cryptocurrencies, tokens, or codes generated through cryptographic methods. No deductions will be allowed except for the acquisition cost, meaning you can't reduce your taxable income by claiming expenses or allowances. In addition, losses from VDA transfers cannot be set off against other income or carried forward to future years. You are responsible for paying the taxes if you receive VDAs as a gift.

The Finance Bill 2022 includes a new section 194S, which requires a TDS of 1% on payments related to the transfer of VDAs. However, in the case of VDA transfers on crypto exchanges, the responsibility for deducting tax is of the exchange itself, as buyers may not have information about the sellers. This can create challenges, particularly in swap transactions involving different VDAs.

COMMON MISTAKES TO AVOID

Let's dive into five common mistakes to avoid while filing taxes on crypto income in India.

Failure to Report Crypto Transactions

One of the most common mistakes people make when filing taxes for cryptocurrencies in India is not disclosing their transactions. Unlike traditional financial institutions, major banks don't usually offer cryptocurrency services, so most crypto transactions happen on smartphones or mobile platforms without any commissions. This setup creates a gaming-like environment for crypto trading, where investors aim to achieve the highest account balance or "score" by buying and selling frequently.

Additionally, many crypto trading platforms didn't report transactions until recently, contributing to the confusion. However, failing to report these transactions can have serious legal consequences, which may result in penalties and interest on the unreported income. Therefore, it's crucial to accurately report all your cryptocurrency gains and losses to avoid any potential problems.

Ignoring Tax Implications on Crypto Trading

When you trade cryptocurrencies, you are essentially buying and selling assets. Therefore, any profits you make from trading cryptocurrencies are taxable in India. The Indian government taxes all income, regardless of where it is earned. This means that if you make a profit from trading cryptocurrencies, you are required to pay taxes on those profits, even if you are not a resident of India.

If you ignore the tax implications of crypto trading, you could be subject to penalties and interest. The penalties for tax evasion can be severe, and they can even lead to jail time. Additionally, many individuals mistakenly assume that trading between different cryptocurrencies is tax-free. However, in India, crypto-to-crypto trades are considered taxable events. Therefore, you need to calculate the gains or losses for each trade and report them accordingly.

Non-disclosure of Foreign Crypto Assets

If you hold cryptocurrencies in offshore exchanges or foreign wallets, you must disclose these holdings in your tax return. The income tax department in India has been actively pursuing tax evaders and tax compliance. Failing to report foreign crypto assets can lead to penalties and legal consequences.

Incorrect Valuation of Crypto

An accurate valuation of your cryptocurrency holdings is crucial for tax purposes. In India, you must value your cryptocurrencies in Indian rupees (INR) based on fair market value as of the date of each transaction. Therefore, unreliable or outdated exchange rates could lead to inaccurate tax calculations. Also, it must be remembered that the GOI doesn't allow set off on losses; the tax is to be paid on the gross profit.

Neglecting to Consult a Tax Professional

The tax treatment of cryptocurrencies in India can be complex and the rules are subject to change. Therefore, it's advisable to consult a qualified tax professional or Chartered Accountant with expertise in cryptocurrency taxation. They can provide guidance tailored to your specific situation and ensure compliance with the latest regulations.

Full Disclosure of VDAs shall be done in Schedule VDAs

Regarding Virtual Digital Assets (VDAs), it is important to fully disclose them in the appropriate section called "schedule VDAs" while filing your taxes. This means you need to provide detailed information about the VDAs you own or have received. Furthermore, VDAs obtained through mining or airdrops will be subject to taxation based on individual slab rates. This means the tax you owe on these assets will be determined according to the income tax slabs that apply to your overall income.

It's crucial to accurately report and disclose your VDAs and any income generated from mining or airdrops to ensure compliance with tax regulations and avoid potential penalties or legal issues. Moreover, in future, when such receipts of VDAs as airdrops and mining are held as investments, the same shall be considered a capital asset and will be subject to 30% taxation on subsequent sales.

TDS Compliances

Tax Deducted at Source (TDS) is deducted from crypto transactions to tax traders and investors. TDS applies to both buyers and sellers in crypto-to-crypto transactions. As per Section 194S, TDS at 1% will be applicable on transferring any Virtual Digital Assets (Crypto, NFTs). If you trade on Indian Exchange, TDS will be deducted by the exchanges and will be deposited to the government. On the other hand, if the buyer trades in P2P transactions or on foreign exchanges, the buyer will be liable to deduct TDS and duly deposit it with the government on or before the 7th of the subsequent month.

CONCLUSION

Filing taxes for crypto transactions is crucial and must be done promptly and accurately. Registered users should seek professional assistance or turn to reliable consulting platforms like TaxNodes to avoid common mistakes. TaxNodes specialises in crypto tax computation and expert-assisted ITR filing. They offer tailored solutions for individuals and businesses in India's ever-changing realm of Virtual Digital Asset (VDA) taxation.

With their advanced software and market analysis, TaxNodes ensures precise reporting and compliance, complemented by a user-friendly interface. Moreover, their expert consultation services provide personalised advice, making TaxNodes a valuable resource for navigating VDA taxation in India effortlessly.

byAstik Dubey

Astik is a law student diving deep into indirect Tax and business law. With a flair for business writing and a special interest in crypto taxation, he turns complexity into captivating articles. Join his enlightening blog, where law and business intersect.

•