How to File Schedule VDA in ITR: Reporting Crypto & VDA Income in India

The Indian financial landscape has witnessed a significant surge in interest and investments in virtual digital assets (VDAs) such as cryptocurrencies and non-fungible tokens (NFTs). With this growing trend, it becomes imperative for taxpayers to understand the tax implications and reporting requirements associated with VDAs. The Indian government has introduced Schedule VDA in the Income Tax Return (ITR) forms to facilitate the reporting of income from VDAs.

In this comprehensive guide, we will delve into the intricacies of Schedule VDA, elucidating the step-by-step process of filingit, along with essential insights for Indian taxpayers.

Understanding Schedule VDA

Schedule VDA, a newly introduced section in Income Tax Return (ITR) forms, is revolutionizing how Indian taxpayers report income derived from Virtual Digital Assets (VDAs). VDAs, which encompass cryptocurrencies like Bitcoin and Ethereum, as well as Non-Fungible Tokens (NFTs), have gained immense popularity in recent years. With this surge in VDA investments, it becomes paramount for taxpayers to accurately disclose their VDA-related income and comply with tax regulations. This is where Schedule VDA steps in.

The Role of Schedule VDA in Tax Compliance

Schedule VDA serves a dual purpose:

1. Structured Reporting: It offers a well-organized format for taxpayers to systematically disclose their VDA-related income. This includes details such as the date of each transaction, the type of VDA involved, the nature of the transaction (buy/sell/exchange/gift), the quantity of VDA transacted, the consideration received or paid (in INR), and the mode of transaction (exchange, wallet, peer-to-peer).
2. Ensuring Compliance: By providing a comprehensive view of your VDA transactions, Schedule VDA helps you accurately calculate your tax liability. This ensures that you are fully compliant with the tax regulations governing VDA income and avoid any potential penalties.

Who Needs to Pay Attention to Schedule VDA?

While the world of Virtual Digital Assets (VDAs) is exciting, not everyone needs to dive into the complexities of Schedule VDA. Let's break down the specific criteria that determine who needs to file this schedule:

1. Resident Indian:

The first and foremost requirement is your residential status in India. Only taxpayers classified as resident Indians under the Income Tax Act, 1961, need to concern themselves with Schedule VDA. If you're a Non-Resident Indian (NRI), you're exempt from this requirement.

2. Active VDA Transactions:

This criterion applies if you've dipped your toes into the VDA market. Any form of transaction involving VDAs, such as buying, selling, exchanging, or even gifting, during the financial year, makes Schedule VDA relevant for you. Whether you're a seasoned trader or a casual investor, any interaction with VDAs brings you into the scope of this schedule.

3. Income Exceeding Basic Exemption Limit:

Your income level is a key factor. If your total income, including income from VDA transactions, exceeds the basic exemption limit set for your tax slab, then filing Schedule VDA becomes mandatory. This limit can vary based on your age and residential status, so be sure to check the current limits applicable to you. The basic exemption limit for the financial year 2023-24 is ₹2.5 lakhs for individuals below the age of 60 years.

Key Components of Schedule VDA

Schedule VDA comprises several sections that need to be filled diligently:

1. Date of Acquisition

The date of acquisition refers to the specific date on which you acquired the VDA. This could be through:

• Buying: The date you purchased the VDA from an exchange or another individual.
• Mining: The date you successfully mined the VDA.
• Receiving as a Gift: The date you received the VDA as a gift.
• Other Means: Any other legitimate way of acquiring the VDA.

2. Date of Transfer

The date of transfer refers to the specific date on which you relinquished ownership of the VDA. This could occur through:

• Selling: The date you sold the VDA on an exchange or to another individual.
• Exchanging: The date you exchanged one VDA for another.
• Gifting: The date you gifted the VDA to someone else.
• Other Disposals: Any other method of transferring ownership of the VDA.

Why is the Date of Acquisition and Date of Transfer Important?

The date of acquisition and transfer is crucial for the following reasons:

1. Calculating Holding Period: The holding period is the duration for which you held the VDA before selling or transferring it. It determines whether your gains are considered short-term (held for 36 months or less) or long-term (held for more than 36 months). Short-term and long-term capital gains are taxed at different rates.

2. Fair Market Value for Gifts: If you received the VDA as a gift, the fair market value of the VDA on the date of acquisition (the date you received it) will be considered for tax purposes. If you gifted the VDA, the fair market value of the VDA on the date of transfer is considered for tax purposes. The recipient will be liable to pay tax on any gains arising from the subsequent sale of the gifted VDA.

3. Head under which income to be taxed (Capital Gain)

In India, income generated from the transfer of Virtual Digital Assets (VDAs) is treated as "Capital Gains" for tax purposes. However, it's important to understand that VDA gains are not subject to the usual capital gains tax regime. Instead, a special provision has been introduced to tax VDA income.

Section 115BBH: The VDA Tax Provision

Section 115BBH of the Income Tax Act, 1961, specifically deals with the taxation of income from the transfer of VDAs. It outlines the following key points:

1. Flat Tax Rate: Income from the transfer of VDAs is taxed at a flat rate of 30%, regardless of whether the gains are short-term or long-term. This means there's no distinction based on the holding period of the VDA.

2. No Deductions Allowed: Except for the cost of acquisition of the VDA, no other deductions or expenses are allowed while calculating the taxable income from VDA transfers. This includes expenses like brokerage, transaction fees, or any other charges incurred while buying or selling VDAs.

3. No Set-Off or Carry Forward of Losses: Losses incurred from VDA transactions cannot be set off against any other income, nor can they be carried forward to future years.

4. Cost of Acquisition 

In simple terms, the cost of acquisition refers to the total amount you spent to acquire the VDA. This includes:

1. Purchase Price: The price you paid to buy the VDA, whether it was from an exchange, a broker, or another individual.
2. Direct Expenses: Any expenses directly related to acquiring the VDA, such as brokerage fees, transaction fees, gas fees (for transactions on blockchain networks), and other charges levied by the platform or exchange.

Exclusions from Cost of Acquisition

It's important to note that not all expenses can be included in the cost of acquisition. The following are generally excluded:

• Indirect Expenses: Expenses like interest paid on loans taken to buy VDAs, advisory fees, or any other expenses not directly linked to the acquisition process.
• Expenses After Acquisition: Costs incurred after acquiring the VDA, such as wallet maintenance fees or charges for transferring VDAs between wallets.

Special Scenarios

The calculation of cost of acquisition can vary in certain situations:

• VDAs Received as Gifts: If you received VDAs as a gift, the cost of acquisition for you will be the fair market value of the VDA on the date you received it.
• VDAs Acquired Through Mining: For mined VDAs, the cost of acquisition would typically include the cost of electricity and other resources used in the mining process.
• VDAs Acquired Through Airdrops or Forks: The cost of acquisition for such VDAs is usually considered to be zero, as you didn't directly purchase them. However, any expenses incurred to claim or receive these VDAs might be considered.

5. Consideration Received

"Consideration Received" refers to the value you obtain in exchange for transferring your VDA. This value plays a pivotal role in calculating your taxable gains or allowable losses when filing Schedule VDA. Let's delve deeper into this critical aspect:

What Constitutes Consideration Received?

Consideration received can take various forms, depending on the nature of your VDA transaction:

1. Fiat Currency (INR): This is the most common form of consideration, where you receive Indian Rupees (INR) in exchange for selling your VDA.
2. Other VDAs: You might receive another VDA, such as Bitcoin for Ethereum, in exchange for your original VDA. In this case, the fair market value of the received VDA on the date of transfer is considered as the consideration received.
3. Goods or Services: In some cases, you might receive goods or services in exchange for your VDA. The fair market value of the goods or services received is considered as the consideration.
4. Combination of the Above: You might receive a combination of fiat currency, other VDAs, or goods/services as consideration for a single transaction. In such cases, the total value of all the forms of consideration received is taken into account.

Determining the Value of Consideration Received

The value of consideration received needs to be accurately determined for tax reporting purposes. Here's how it's done for different scenarios:

• Fiat Currency: The amount of INR received is the consideration value.
• Other VDAs: The fair market value of the received VDA on the date of transfer is the consideration value. This can be ascertained from reliable sources like cryptocurrency exchanges or market trackers.
• Goods or Services: The fair market value of the goods or services received is the consideration value. This can be determined based on invoices, receipts, or market prices.
• Combination: In cases where you receive multiple forms of consideration, the total value of all the components needs to be calculated based on the above methods.

6. Income from transfer of Virtual Digital Assets

Income from VDA Transfer = Consideration Received - Cost of Acquisition

• Consideration Received: This is the value you obtained when you sold or transferred the VDA. It could be in the form of Indian Rupees (INR), other VDAs, goods, services, or a combination of these.
• Cost of Acquisition: This is the total amount you spent to acquire the VDA, including the purchase price and any direct expenses related to the acquisition.

If the consideration received is greater than the cost of acquisition, it results in a taxable gain. Conversely, if the consideration received is less than the cost of acquisition, it results in a loss. No set-off is available for losses. The "Capital Gains" in this case will be treated as "Nil". (Gain or loss is automatically calculated by the system) 

Example:

Let's say you bought 1 Bitcoin for ₹20 lakhs (cost of acquisition) and later sold it for ₹35 lakhs (consideration received).

Your income from the transfer would be: ₹35 lakhs - ₹20 lakhs = ₹15 lakhs.

This ₹15 lakhs would be considered your taxable gain, and you would need to pay a 30% tax on this amount, as per the special provision for VDA taxation in India (Section 115BBH of the Income Tax Act, 1961).

Step-by-Step Guide to Filing Schedule VDA

1. Gather Documentation:

• Transaction Statements: Collect all transaction statements from cryptocurrency exchanges or platforms where you bought, sold, or exchanged VDAs. These statements should include details like dates, amounts, types of VDAs, and transaction fees.
• Wallet Statements: If you store VDAs in private wallets, download and save statements showing transaction history.
• Purchase Records: If you purchased VDAs directly from individuals or through peer-to-peer platforms, keep records of these transactions, including invoices, receipts, or any agreements.
• Gift/Inheritance Records: If you received VDAs as gifts or inheritance, gather documentation proving the acquisition and any applicable valuation.
• Other Supporting Documents: Keep any other relevant documents like airdrops, forks, or any other transactions that resulted in VDA acquisition or disposal.

2. Access the ITR Portal:

• Go to the official Income Tax Department e-filing website: https://www.incometax.gov.in/iec/foportal/
• Log in using your user ID (PAN), password, and captcha.

3. Select the Relevant ITR Form:

• Based on your income sources and residential status, choose the appropriate ITR form:
  • ITR-2: For individuals and HUFs not having income from profits and gains of business or profession.
  • ITR-3: For individuals and HUFs having income from profits and gains of business or profession.

4. Navigate to Schedule VDA:

• After filling in the general details in the ITR form, you will typically find Schedule VDA under the "Income" Section during Schedule Selection.
• Click on "Schedule VDA" to open it. This section is specifically designed for reporting income or losses from VDA transactions.

5. Add Details:

• Click on the "Add details" button. This will open a new section where you can input the details of a specific Virtual Digital Asset (VDA) transaction (e.g., buying or selling cryptocurrency).

6. Date of Acquisition:

• Enter the exact date you acquired the VDA. This is crucial for calculating capital gains or losses, especially if you've held the VDA for over a year (which could affect the tax rate).

7. Date of Transfer:

• Enter the exact date you sold or transferred the VDA. This marks the end of your holding period and is used to determine the tax year the income falls under.

8. Cost of Acquisition:

• Enter the total amount you paid to acquire the VDA. This includes the purchase price, any fees, and any other costs directly related to getting the VDA. This is essential for calculating your gains or losses accurately.

9. Consideration Received:

• Enter the total amount you received when you sold or transferred the VDA. This includes the selling price and any other income related to the transfer.

10. Income from Transfer of Virtual Digital Assets:

• The system will automatically calculate the gain or loss from your transaction based on the information you provided. This will be the difference between the "Consideration Received" and the "Cost of Acquisition."
• If the system calculates a loss, make sure to double-check your entries to ensure accuracy.

11. Add the Transaction:

• Click the "Add" button to save this transaction to Schedule VDA.
• If you have multiple VDA transactions, repeat steps 5-11 for each one.

12. Verify and Submit:

• Carefully review all the information you've entered in Schedule VDA. Check the dates, amounts, and calculated gains or losses.
• If everything is correct, verify the information. This usually involves checking a box to confirm the accuracy of your data.
• Finally, submit your ITR.

Conclusion: Navigating the Evolving Landscape of VDA Taxation in India

The introduction of Schedule VDA marks a significant step in India's journey toward formalizing the taxation of virtual digital assets (VDAs). This dedicated section within the Income Tax Return (ITR) provides a structured framework for taxpayers to report their income from VDAs transparently and accurately.

By following this comprehensive guide and adhering to the provided guidelines, taxpayers can confidently navigate the complexities of VDA taxation. Diligently gathering documentation, accurately calculating gains or losses, and reporting all transactions meticulously are crucial steps in ensuring compliance with tax regulations and avoiding any penalties.

While Schedule VDA simplifies the reporting process, it's important to remember that the VDA landscape is constantly evolving. Tax laws and regulations surrounding VDAs may change over time. Therefore, it's imperative for taxpayers to stay informed about the latest updates issued by the Income Tax Department and seek professional advice when needed.

As India embraces the digital age, the government's proactive approach to VDA taxation is a positive step toward creating a fair and transparent financial ecosystem. By actively participating in this process, taxpayers not only fulfill their legal obligations but also contribute to the growth and development of the VDA sector in the country.

Remember, accurately reporting VDA transactions is not just a legal requirement; it's an opportunity to demonstrate your commitment to a responsible and accountable financial system. By staying informed, seeking guidance, and adapting to the changing regulations, you can confidently navigate the evolving landscape of VDA taxation in India and contribute to its future growth.

Disclaimer:

The information provided in this article is for general informational purposes only and should not be considered as financial or tax advice. While every effort has been made to ensure the accuracy of the information presented, tax laws and regulations can be complex and subject to change. Please consult with a qualified tax professional or financial advisor for personalized advice tailored to your specific situation.