Crypto Tax Filing: Key Mistakes To Avoid While Reporting Crypto Income

As cryptocurrencies become a part of more investors' portfolios, reporting crypto-related income accurately in income tax returns has become increasingly important. With the adoption of virtual digital assets on the rise, even small reporting mistakes can lead to tax complications or notices.

In India, gains from virtual digital assets such as cryptocurrencies are taxed at a flat 30 per cent, regardless of the holding period. Also, a 1 per cent tax deducted at source (TDS) is applicable on crypto transactions. Here are some common mistakes taxpayers should avoid while reporting crypto gains and the steps they can take to file their returns correctly.

Not Reporting All Crypto Transactions

Many taxpayers sometimes miss showing all their crypto transactions while filing tax returns, which includes small trades or transactions made across different crypto platforms during the year. Even if the amounts are small, they still need to be reported while filing income tax returns. Missing out these details can create mismatches with records available to the tax department, such as the AIS or Form 26AS.

Trying to Adjust Crypto Losses Across Transactions

Under the current taxation framework for virtual digital assets, losses from crypto transactions cannot be set off against gains from other crypto transactions.

CA Ashish Niraj, Partner at A S N & Company, Chartered Accountants, said a common mistake among crypto investors is netting off gains and losses from different crypto transactions and reporting only the net figure, which can lead to under-reporting of income.

He added that in those cases, the tax department may levy interest and penalties for misreporting or underreporting of income.

Ignoring TDS Under Section 194S

The 1 per cent TDS deducted on eligible crypto transactions is sometimes missed while filing income tax returns. In most cases, the tax is often deducted by the exchange; it is important to check whether the same details are reflected in Form 26AS or the AIS. Any mismatch can affect the TDS credit claimed and can delay the processing of your return.

Choosing the Wrong ITR Form

Many taxpayers are confused about which ITR form they should use while reporting crypto income. Investors need to file ITR-2, while those involved in crypto trading as a business may have to file ITR-3. Also, it is equally important to report crypto transactions under Schedule VDA.

Incorrect Reporting of Crypto Income Types

Income earned from airdrops, staking rewards or referral bonuses is sometimes not reported by taxpayers while filing their income tax returns. These are usually taxable at their value on the date of receipt and are typically reported as Income from Other Sources. If the airdropped tokens are sold later, any gains arising from their transfer are also taxable under the provisions applicable to virtual digital assets.

Ashish Niraj advised investors to prepare Schedule VDA accurately and file ITR-2 or ITR-3, instead of ITR-1. He also advised taxpayers to cross-check Form 26AS and AIS before filing their returns, as any mismatch with the ITR may invite notices from the Income Tax Department.