Crypto / VDA Income Tax Preparation Guide

This document covers

1. Background
2. How to prepare Income Tax Returns with Cryptos?
1. Reporting of Crypto Income
2. Taxability of Crypto Income
3. Crypto data preparation from various exchanges
   1. Binance Crypto Instructions
   2. WazirX Crypto Instructions
   3. Zebpay Crypto Instructions
   4. CoinDCX Crypto Instructions
   5. Coin Switch Crypto Instructions
4. How gains are calculated - an example?
5. When to report Crypto income under Foreign Assets?
3. What to consider when paying & preparing TDS Return for Crypto Sale?
4. Practical Challenges with Crypto Taxation
5. FAQs

1. Background

A cryptocurrency (aka crypto) is a digital or virtual currency designed casually and later became popular, used as a currency in certain parts of the world, to buy things like a typical physical currency (Indian Rupee) do. Govt of India, CBDT (Central Board of Direct Taxes) coined as "VDA" (virtual digital asset) to encapsulate cryptos, and other digital currencies along with NFTs (non-fungible token).

Starting from FY 2022-23, Crypto is considered as a "special asset" where the tax rate applicable would be 30% without indexation, without expenses (including mining expenses), without set-off against any income within the year (including the crypto income), and without carry forward losses to future years.

Except it is considered for taxation in India, for all other purposes, cryptos / VDAs / NFTs are un-regulated, un-recognised assets in India.

Refer more on Cryptos @ Crypto Tax Help Center

2. How to prepare Income Tax Returns with Cryptos?

Before start preparing taxes from crypto income / activity, one need to prepare the crypto income for reporting and/or tax computation. Also, et times, a foreign born crypto income need to be reported under 'Foreign Assets' schedule.

2.A. Reporting of Crypto Income & how to prepare data

Important things to consider when reporting the Crypto Income for income tax filing. Also refer the below table to understand who should file taxes from the perspective of crypto income or activity.

1. Jurisdiction:

   Determine whether the exchange is in India or outside India? You may check based on the registered office of the company / firm.

2. Tax Residency Status:

   Determine whether you are a tax resident of India or NRI? You may use Tax Residency Status Calculator

3. Trading Data:

   Get the Trade History * (Transaction Statement) from the Exchange website for FY 2022-23 (from 1st Apr 2022 to 31st Mar 2023). The data need to be copied into the EZTax template to upload to compute taxes.
   
   Few of the exchange / broker instructions are listed below.

2.B. Taxability of Crypto Income

Table to identify who should pay, file taxes, and report crypto assets.

* Statement names may differ based on the Exchange / Broker / Intermediary

2.C. Crypto data preparation from various exchanges

There are 1000's of crypto intermediaries or exchanges in the world, but we choose few prominent exchanges to provide data preparation instructions. The remaining would be as similar as the instructions given.

Crypto / VDA Ledger Excel Sample Data from EZTax.
* Rate & Total Amount can be in their respective stable coin currency or real currency. EZTax will convert the 'Total Amount' column whose cryptos backed with 'USD', 'GBP', 'EURO', 'YEN', 'USDT', 'USDC'. For remaining currencies, these two columns to be converted into INR before uploading.

2.C.i. Data preparation instructions for Binance

2.C.ii. Data preparation instructions for WazirX

2.C.iii. Data preparation instructions for Zebpay

2.C.iv. Data preparation instructions for CoinDCX

1. Login to https://coindcx.com/
2. After login, click on “Orders” at the top right-hand side of the screen
3. Click on “Order History” from the orders dropdown.
4. Click on Download CSV at the right hand side of the screen
5. Select the status as “All” and select the “duration”.
6. The statement will be downloaded in CSV File

Once the data is uploaded, EZTax will automatically read the gains and losses and do the necessary tax calculations. Refer Tax Summary page and Draft ITR Report for review of your taxes.

2.C.v. Data preparation instructions for Coin Switch

2.D. How gains are calculated - an example?

Below is a scenario where Mr. Ram trading on Ethereum INR at the same exchange on the same day. Example narrates how the profit gets calculated.

2.E. When to report Crypto income under Foreign Assets?

1. If the exchange is located in India, there is no need to report under Foreign Assets for the holdings.
   Example: Zebpay
2. If the exchange is located outside India, you need to report the same under Foreign Assets.
   Example: Binance.
3. Following details needs to be reported under foreign assets
   
   1. Country in which exchange located.
   2. Nature of Asset as "Crypto/VDA"
   3. Date of Acquisition
   4. Cost of investment
   5. Income generated from such assets. This must match with the profit reported under EZTax Crypto Questionnaire

3. What to consider when paying & preparing TDS Return for Crypto Sale?

1. Budget 2022 has introduced the concept of TDS on Virtual Digital Assets (VDA) w.e.f July 01st 2022
2. Buyer of VDA is required to pay TDS @ 1% on the total amount of consideration if the aggregate amount exceeds Rs 10,000 in a financial year
3. CBDT has released the guidelines for deduction of TDS on VDA
   1. Peer or Peer Transactions: Buyer is required to deduct TDS and file Form 26Q or 26QE
   2. Transfer of VDA through an exchange and VDA is owned by another person:
      1. Amount paid to Exchange by buyer directly or through a broker: Exchange is required to deduct TDS and file Form 26Q
      2. If the payment between exchange and the seller is through a broker(broker is not seller): Exchange and Broker are liable to deduct TDS. If there is a written agreement between the exchange and broker, the broker needs to deduct TDS and file Form 26Q. Exchange needs to file Form 26QF
   3. Transfer of VDA through an exchange and VDA is owned by such exchange.
      1. Amount paid to Exchange by buyer directly: Buyer is required to deduct TDS
      2. Amount paid to Exchange through a broker: Broker is required to deduct TDS.
4. The sellers can claim the TDS deducted as a credit while filing their Income Tax Returns

4. Practical Challenges with Crypto Taxation

Even though the CBDT has issued guidelines to remove difficulties with respect to TDS, there are certain issues in taxation of crypto's in India.

1. Lack of Clarity: Budget 2022 has introduced the taxation on crypto currency transactions but the details and guidelines for implementation are not clear yet. CBDT is yet to release the guidelines regarding the same.
2. Exchange Rates: There is no availability of exchange rates for conversion from 1 coin to another coin to bring the uniformity in sale and purchase prices.
3. Data Standards: Every exchange or broker is providing the data in the different formats. There is no standard format for the exchanges or brokers. As the data is in different formats, it is very complex to obtain profit/loss for every transaction.
4. Transaction Timing / Accuracy: In some reports provided by certain brokers, the sale transaction is happening before buy transactions, and it is creating the issues while computing profit and loss.
5. Implementation of TDS: There is no clarity from the Income Tax department on TDS applicability if the sellers are outside India or foreign exchange is involved
6. DTAA: Double taxation provisions are not yet clear. The crypto profits might be taxed in multiple countries and the provisions related to tax relief are not yet notified
7. Non-Domestic Exchanges: If the taxpayers are trading in foreign exchanges, it will be difficult for the tax authorities to monitor them

To address these challenges, the Government needs to provide clear regulations an guidelines for crypto currency transactions

5. FAQs