July 31 st is the deadline for individuals to file returns under the new framework for taxation of income from virtual digital assets (VDAs) or commonly referred as cryptocurrencies that was introduced from April 1, 2022. Companies have to complete filings by October or November as applicable. Income tax returns (ITRs) were also modified accordingly, and the current tax filings will be the first instance when income from transfer of VDAs will be captured separately.
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This has thrown up various questions and left stakeholders looking for answers. Previously income from transfer of VDAs could have been characterised as business income, capital gains or other income, depending upon facts and circumstances, however, from FY 2022-23 onwards, such income could be characterised as business income or capital gains only. While deductions and set off of losses are not allowed, thereby neutralising the distinction between the different classifications, interest on delay of payment of advance tax could still be an issue to watch out for.
The transactions pertaining to income from transfer of VDAs is required to be disclosed under the Schedule VDA in the ITR forms. As per literal interpretation of provisions under the ITA (Section 115BBH), the intent seems to levy tax on a transactional basis. For eg. Sale of 0.5 BTC is one transfer and sale of 0.25 BTC is another transfer, and both are to be taxed separately. However, if two transfers take place on the same date, can they both be clubbed and reported in Schedule VDA as the form suggests? Or when a VDA sale order is placed and it is sold in 7 different fractions, should each fraction be individually reported? What is the lowest value for it to qualify as a VDA for reporting?
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Further, unlike shares related disclosures, where name of each share is required to be specified, there is no similar disclosure requirement under Schedule VDA. Therefore, it is unclear whether taxpayers should club inter-coin trades (one BTC trade and one ETH trade) as well and disclose it on a daily basis (rather than per transaction basis). However, question remains whether loss from one intra-day trade could set off profit generated from other intra-day trade.
The instructions for filing the ITRs provides that date of transfer of a VDA cannot be before date of acquisition of VDA. Hence, in case of short selling transactions [where first a VDA is borrowed and sold, and then further purchased in future at a lesser price for repayment], it may not be permissible to disclose transactions in such manner.
Determination of gains seems impossible in the absence of any prescribed valuation mechanism, especially in respect of VDA to VDA trades (where there is no INR base). While certain VDA exchanges provide INR rates as well in respect of even VDA to VDA pairs, however, where inter exchange trades are done (i.e. purchase of VDA on one exchange and sale on another exchange), determination of price is challenging due to varied rates on each exchange (for instance, USDT rates generally vary across).
All resident taxpayers are required to furnish details of foreign assets and income from any source outside India under Schedule FA in the ITR. VDA balances held on a domestic exchange should not qualify as a ‘foreign asset’ and taxpayers may not be required to disclose them under the Schedule FA. However, there is limited clarity on disclosure of balances held in custodial wallets which are not on an exchange. It is likely that situs of intangible assets is the location of the owner and accordingly.
VDAs held on even foreign VDA exchanges do not constitute ‘foreign assets’. However, Schedule FA also requires disclosure of even ‘accounts located outside India where the taxpayer has a signing authority’, hence, it is not clear whether such accounts are required to be disclosed. If VDAs on a foreign VDA exchange are considered to be foreign assets, there could be implications under foreign exchange regulations as well, therefore it should not be declared simply as a matter of abundant caution.
Lastly, taxpayers are required to disclose their assets and liabilities in the schedule AL in case total income exceeds INR 50 lakhs. Whether VDA balances are required to be disclosed in the Schedule AL (or in Part A – Balance Sheet, in case the taxpayer is engaged in business of trade of VDAs) or not, has also not been specified.
Based on the B.C. Srinivasa Setty judgment passed by the Hon’ble Supreme Court of India (where it was held that in case computation provisions cannot apply then levy of tax fails), it could be argued that levy of tax on transfer of VDAs fails making these provisions susceptible to a legal challenge. A quick fix could be specifying benchmark rates (such as telegraphic transfer rates in case of foreign exchange transactions), followed by detailed valuation guidelines with examples.
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