Crypto Tax Filing: Common Mistakes To Avoid While Disclosing Your Gains

With the financial year coming to an end, crypto investors in India must ensure accurate tax reporting to avoid penalties and compliance issues. Since the government has imposed a 1 per cent Tax-Deducted At Source (TDS) on crypto transactions and a 30 per cent tax on crypto-related gains, it is essential that you report your income correctly in your income tax return.

You can report your cryptocurrency gains accurately by avoiding some common mistakes. Here’s a look at some common mistakes to avoid while disclosing crypto gains:

1. Using the Wrong ITR Form

Cryptocurrency investors frequently make the common mistake of selecting the incorrect ITR form which can result in improper reporting and tax concerns. The selection of the form depends on how the income from cryptocurrency is classified whether it falls under capital gains or business income.

Investors often struggle with selecting the correct ITR form for crypto gains. If classified as capital gains, ITR-2 is required, whereas frequent trading as a business activity falls under ITR-3,” says Edul Patel, Co-Founder and CEO of Mudrex.

2. Ignoring TDS Deductions

Failing to account for the 1 per cent TDS on crypto transactions can result in mismatches in tax records and potential scrutiny from the Income Tax Department. Since July 1, 2022, the TDS deduction has been imposed on all trades. However many investors tend to overlook it while filing their ITR. Omitting this detail can lead to unexpected tax obligations and disparities in the reported income.

3. Misreporting Crypto Gifts and Airdrops

Cryptocurrency units received as gifts or through airdrops are not tax deductible and must be declared as income from other sources. However, some investors often choose not to reveal these profits as they think they are tax-free. Airdrops and gifting cryptocurrency are regarded by the IT department as taxable income, and improper reporting of these may result in investigation or sanctions.

4. Attempting to Offset Crypto Losses Incorrectly

Crypto losses cannot be offset against other types of income, yet some investors attempt to reduce their tax liability by adjusting losses against salary, rental income, or other sources. Losses from cryptocurrency cannot be carried forward to subsequent years or deducted from other income under Section 115 BBH this in turn can result in increased tax scrutiny if the losses are not reported correctly.

What to Do if Crypto Gains Are Misreported

It is important to take appropriate action to ensure accurate tax filing in order to rectify any past mistakes made while reporting cryptocurrency gains.

Edul advises, “Investors who have misreported their crypto gains should promptly file a revised return under Section 139(5). If they receive a Section 148A notice, they must respond with trade statements and bank records to clarify their transactions. Additionally, it is important to preserve transaction history, TDS certificates, and cost-acquisition proofs for future compliance.”

To avoid fines, it is essential to file crypto taxes accurately. You can ensure compliance and facilitate the process by utilising the appropriate forms and maintaining thorough records of all your crypto transactions. Additionally investors can also benefit from remaining informed about tax rules and, if necessary, seek advice from qualified tax experts.

Buy on Amazon