A last-minute tax guide for crypto investors

Ensure you have records of all your transactions in place to report gains / losses.

Crypto, or virtual digital assets (VDAs), have come under the purview of the income tax department from the financial year 2023. Since it is an emerging asset and the taxes have only been introduced last year, users have faced challenges in calculating their gains, figuring out the tax deducted at source (TDS), filing taxes on profits from digital assets received as gifts / payment / airdrops, etc.

Airdrops involve sending tokens to the wallets of individuals, either for free or in exchange for a small promotional service.

There are millions of crypto users in India. However, they have limited knowledge in how to classify the income from these assets. Platforms that automatically calculate the tax payable on crypto income have emerged on the scene so that active traders do not have to manually calculate taxes for hundreds of transactions they might have done over a period of time.

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The following steps are a quick last-minute guide for all users filing taxes on virtual digital assets.

• Ensure you have records of all your transactions in place to report gains / losses. You will usually find these records on the exchange where you have done the trades. If you are using a tax calculation platform, you can import these records there to have your taxes calculated. Remember, the information around taxation needs to be given on a per transaction basis.

• Calculating gains or losses on various types of crypto income / transactions can be confusing. You can follow online tutorials or guides from trusted crypto platforms if you’re filing taxes by yourself.

Also read | Income tax returns: Who should use ITR-3 and who shouldn't

• Calculating TDS can be cumbersome. One percent TDS will apply to transactions conducted on or after July 1, 2022. If you’re using an Indian exchange for crypto transactions, chances are TDS is already being deducted on your behalf and deposited with the government. But in case of transactions on a foreign exchange, you might need to file TDS separately.

Please ensure that you check the following details:
1. In case of transactions using peer-to-peer (P2P) platforms, the responsibility of deducting TDS lies with the buyer. P2P trading is where traders directly transact with each other.

2. In case of crypto-to-crypto trades (crypto-to-crypto exchange or swap), both the buyer and the seller need to deduct TDS and deposit the same with the government.

3. With P2P transactions on foreign exchanges, if the seller is Indian, the responsibility for deducting TDS lies with her/him.

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4. Where an Indian is buying from a foreigner, the former is responsible for deducting TDS at a higher rate, subject to specific conditions.

What if you do not file your crypto taxes or file them incorrectly?

• In case you do not adhere to the deadline for filing your taxes, you’ll be charged a late fee of Rs 5,000 under Section 234 F. However, if your total income is below ₹5 lakh, the late fee will be reduced to Rs 1,000.

• Late filing of taxes can also incur interest under Section 234 A at a rate of 1 percent per month or part thereof for the unpaid amount.

• Losses on VDAs need to be disclosed so that there is no discrepancy between information in the ITR and Form 26AS, which indicates the tax credited.

The last date for individuals to file taxes is July 31, 2023. Since taxation on crypto is at a nascent stage, the chances of making a mistake is high. It is recommended that you consult experts in case of any difficulties in comprehending how taxes might be computed for different holding periods or for different sources of crypto.