So, under what head would these transactions need to be reported as each head has its own computational provisions, tax rates, set-off and carry-forward of loss provisions, reporting requirements etc.?
While currently, there are no specific guidance/specific tax provisions on taxation of cryptos in the Income-tax Act, 1961 (the Act), one could draw inference from the general principles of taxation and tax the transactions based on the purpose for which they are used to report the gains and losses in the income tax return (ITR).
One should keep in mind that not reporting transactions in cryptocurrencies in one’s ITR can lead to penal consequences, and in some cases, there could be a risk of prosecution.
Here is a look at how one can report crypto transactions in one’s ITR.
Reporting of cryptocurrency transactions
A taxpayer would have to report transactions related to cryptocurrency as business income if held as stock in trade, or capital gains if held as investments. If reported as business income, then ITR-3 form will be applicable to an individual in FY 2020-21, whereas if it is reported as capital gains from investment, then the individual would have to use ITR-2.
Taxability under business income/capital gains
- Taxability as capital gains: If cryptos are held as investments, then it could be argued that the profit/loss on such sale needs to be reported as capital gains/loss. If the cryptos are held for more than 36 months, then the gain thereon could be classified as long-term capital gains and be subject to tax at 20%, plus applicable surcharge and cess. Else, they could be classified as short-term capital gains, subject to tax at the applicable personal taxation rates. For long-term capital gains, indexation benefit could be availed to increase the cost on account of inflation.
- Taxability as business income: If cryptos are held as stock-in-trade, then it could be taxed under the head business income. The income (net of expenses like purchase cost for cryptos, depreciation on computers/laptops, salary, rental expense, cost for maintenance of accounts etc.) from such activity of trading could be taxed as business income. As mentioned above, for individuals having business income, the prescribed ITR Form, i.e., ITR-3 is to be used (in which case, accounts are required to be audited after specified threshold is crossed). Business income is taxed as per the prevailing slab rates (assuming non-presumptive basis of taxation), plus applicable surcharge and cess.
How to report in ITR-2/ITR-3
If cryptos are treated as investment, then long-term capital gains on sale of cryptos would need to be reported under CG schedule of ITR -2/ ITR-3 (if there are sources of business income), it will be reported under the head “From sale of assets where B1 to B8/B9 above are not applicable” for FY 2020-21.
Short-term capital gains on sale of cryptos would need to be reported in CG schedule of ITR-2/ITR-3 for FY2020-21, under “STCG on assets other than at A1 or A2 or A3 or A4 or A5 above”. Further, the return of income needs to be filed before the due date to claim carry-forward of capital losses, if any, for set-off in subsequent 8 years against earnings from capital gains.
On the other hand, if treated as business income, then sale of cryptos needs to be reported in Part A -Trading account under “Sale of goods” in ITR-3. The net profit/loss from sale of cryptos after reducing the permissible expenses, needs to be reported under the head, “Net profit before taxes”.
For loss incurred in cryptocurrency transactions, the return of income needs to be filed within the due date (July 31 of the year following the tax year, for an individual without any audit requirement, and October 31 following the tax year, if the individual is subject to a tax audit). For FY 2020-21, the aforesaid extended due dates are December 31, 2021 and February 15, 2022, respectively. If the loss is not a speculative loss, then such loss could be carried forward for 8 Assessment Years (‘AYs’) and set-off against business income.
Reporting of cryptocurrency holdings in ITR
If an individual qualifies as resident and ordinarily resident, there is a requirement to report foreign assets under schedule FA, “Details of Foreign Assets and Income from any source outside India” irrespective of income in the tax return.
However, do keep in mind that there are no clear guidelines from the tax authorities on whether cryptos are to be considered as a foreign asset. As cryptos are digital assets, the location where the server is located and the law of the land under which protection is sought could be treated as the location where these assets are located. If it is determined that cryptos are located outside India, then they need to be reported in schedule FA of the ITR.
Additional reporting requirement in ITR
Further, if the net taxable income of the individual exceeds Rs 50 lakh, Schedule AL of the ITR Form is also required to be filled. This schedule requires an individual to report his immovable assets, jewellery, bullion, etc., archaeological collections, drawings, painting, sculpture or any work of art, vehicles, yachts, boats and aircrafts, financial assets like bank balances, including deposits, shares and securities, insurance policies, loans and advances given, and cash in hand. Further, any liability in relation to such assets are also to be reported such as home loan taken for buying a house etc. Currently, there is no guidance on requirement to report cryptos in schedule AL of the currently notified ITR forms.
Penal consequences for not reporting cryptocurrencies in ITR
It must be noted that non-reporting/non-disclosure of these transactions could have various penal consequences. Some of the penal consequences are:
a) If foreign assets/income are not reported in the FA schedule (mandatory for every individual holding foreign assets irrespective of income), it could attract notice for assessment for up to 17 years under the Act.
b) Further, it can also attract various penal consequences under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. Some of these are:
i) A penalty of Rs10 lakh under the provisions of the Black Money Act.
ii) Further, undisclosed foreign income or assets shall be taxed at the flat rate of 30 per cent. No exemption or deduction or set-off of any carried forward losses which may be admissible under the existing Income-tax Act, 1961, shall be allowed.
iii) The penalty for non-disclosure of income or an asset located outside India will be equal to three times the amount of tax payable thereon. This is in addition to tax payable at 30%.
iv) Further, there is a risk of prosecution.
Hence, it is imperative that individuals make proper reporting/disclosures in the tax returns they file and pay appropriate taxes on these transactions when such income is earned. Considering the widespread use of cryptos, and in the absence of guidance on taxability of cryptos, the government should consider coming out with necessary guidelines on taxability of cryptos and the reporting requirements.
(Homi Mistry is a Partner with Deloitte India. With inputs from Ajay Nahata, Senior Manager with Deloitte Haskins & Sells LLP)