ITR filing FY24: Have income from cryptocurrencies, NFTs, virtual digital assets? How to show it in ITR form (2024)

With the tax filing season ending on July 31, 2024, for submitting income tax returns for FY 2023-24, taxpayers are keen to understand how to report income from digital assets. The Income-tax Act has set a “flat rate” for taxing income from virtual digital assets (VDAs) such as cryptocurrencies, non-fungible tokens (NFTs) and other government-notified VDAs.

New tax rules for incomes from VDAs

The income generated from the sale of VDAs in FY 2023-24 will be subject to a tax rate of 30% and applicable surcharge and cess. It is important to note that the losses incurred in one VDA cannot be set off against the profit arising from the transfer of another VDA. Further, you cannot claim deductions for expenses other than the acquisition cost when calculating the income from the transfer of VDA.

For example, you bought bitcoins in FY 2018-19 for Rs 10,000 and sold it in FY 2023-24 for Rs 50,000; and incurred expenses like brokerage and transaction charges of Rs 5,000 on the sale of bitcoins. One must calculate the taxable income and report it in the ITR form. Taxpayers are allowed to deduct only the cost of acquisition (Rs 10,000 in the example) to arrive at profit. Hence, you will report an income of Rs 40,000 (Rs 50,000 minus Rs 10,000) in your ITR form. So the deductions related to brokerage and transaction charges are not allowed.

The income calculated from the sale of VDA will be subject to tax at a fixed rate of 30% without the benefit of the maximum exemption limit. Further, no tax deductions, such as Sections 80C, 80D, will be permitted from the income calculated under this provision. However, a resident individual can claim the benefit of a rebate under Section 87A, of up to Rs 12,500, from the tax computed under this provision if the total income of such an individual is at the most Rs 5 lakh.

If a taxpayer has opted for the new tax regime, the rebate under Section 87A is not allowed on the income arising from the sale of VDA, even if the total income is up to Rs 7 lakh. Many professional bodies have filed a representation before the Central Board of Direct Taxes (CBDT) against this treatment and requested that the utilities be modified to allow relief against the tax payable on the special income.

Any loss arising from the sale of VDAs must also be reported in the ITR form. However, this loss can neither be carried forward nor set off against other income (such as salary, interest income, etc).

Taxable under which head of income
Income from VDA can be subject to taxation under either business income or capital gains. When reporting such income in Schedule VDA, it is crucial to select the appropriate head under which it is offered for taxation.

Income from VDA taxed as business income: Where an individual holds VDAs in the regular course of business, the profits from such transactions should be taxed as business income. This particularly applies to individuals actively trading in cryptocurrencies or engaging in VDA-related business activities.

Income from VDA taxed as capital gains: If the VDAs are held as capital assets (like equity shares, mutual funds, etc), the income generated will be taxed under the head of capital gains. This applies when individuals hold VDAs as long-term investments or personal holdings rather than actively engaging in trading or business activities. However, the benefit of indexation shall not be allowed from the sale of VDAs even if they were held as long-term capital assets.

Therefore, depending on the nature of VDA ownership and its purpose (trading or investment), the income will be categorised and taxed accordingly under either the head of business income (PGBP) or capital gains.

Though the tax rates are the same under the head of business or profession or capital gains, this classification is essential for the computation of interest under Section 234C. This section is applicable for penal interest in case of delayed advance tax payments.

Where a shortfall in payment of advance tax happens due to underestimating or failure to estimate the accrual of capital gains, then such shortfall shall be ignored while computing interest under Section 234C. In other words, taxpayers get immunity from the interest for deferment of advance tax if income from VDAs is offered to tax as capital gains. However, if the assessee disclosed income from the sale of VDA as business income, interest under Section 234C shall be levied if the assessee has the liability to pay the advance tax but fails to pay the same, or the amount paid in each instalment is less than the amount he should have paid in such instalments

Which ITR form is to be used to report income from VDA?
The selection of the appropriate ITR form will depend on the specific head under which you are choosing to declare this income for taxation purposes. If you report it as capital gains, you can disclose it in ITR-2. On the other hand, if you report it as business income, you can use the form ITR-3. It is important to note that you cannot use ITR-1 or ITR-4 to report such income.

How to report income from VDA in ITR form?
Any income generated from the sale of VDAs must be reported in “Schedule VDA” in the ITR form (ITR-2 or ITR-3, as applicable). Schedule VDA requires details such as the acquisition date, date of sale, category of income for taxation (capital gains or business income), acquisition cost, and income earned from selling VDA.

If the VDA is received as a gift that was exempt in the hands of the recipient, the cost at which the previous owner acquired it will be treated as the cost of acquisition. However, if the value of the VDA is charged to tax in the hands of the recipient under Section 56(2)(x) at the time of receipt, then such value will be considered as the cost of acquisition.

For example: Mr A sold Rs 20 lakh worth of cryptocurrency on February 28, 2024. He acquired this cryptocurrency on October 1, 2021, for Rs 17 lakh. When reporting this transaction as capital gains in the ITR, the income should be reported in Schedule VDA in ITR-2 as follows.

When VDAs are sold, tax is deducted at 1% under Section 194S. The taxpayers must provide information about the tax deducted on VDA sales in “Schedule TDS” in the ITR form. Do note that this information is usually auto-populated in the ITR form. However, it is advised that one cross-check this information to ensure that correct information is entered in the ITR form.

What is the due date for filing the ITR?
If you earn income only from cryptocurrencies, the due date for filing your ITR depends on the head under which you report this income. When reporting income from the sale of virtual digital assets in Schedule VDA, you need to select whether it falls under the category of business income or capital gains.

Here is how the due date is determined based on the chosen category:

Capital gains: If you report the income as capital gains, your due date for filing the ITR will be July 31
Business income: If you report the income as business income, you need to compute the turnover to determine whether you must get your accounts audited. If your turnover exceeds the specified limit, you must have your accounts audited, and in that case, the due date for filing your ITR will be October 31. Also, you must submit the audit report to the income tax department by September 30. However, if your turnover is below the specified limit, the due date for filing your ITR will be July 31.

(Naveen Wadhwa is Vice-President, Taxmann. Tarun Kumar Madaan is a chartered accountant.)