Do you have to report cryptocurrency investments as foreign assets in your income tax return?

Most experts agree that gains or losses in cryptocurrency trading have to be reported in your income tax return (ITR). However, there is no clarity on whether the cryptocurrency investments have to be reported in ITR even if there has been no trading and no gains/losses from the same.

As per current income tax laws, an individual is required to report all of his/ her foreign assets irrespective of his/her income level. So do you have to report your cryptocurrency investments while you file your ITR for the financial year 2020-21?

What the income tax rules state

Here is what the current income tax rules state about reporting of cryptocurrency holdings in your ITR:
1) If an individual's net taxable income exceeds Rs 50 lakh, then he/she will have to report their assets and liabilities using Schedule AL of the ITR form.

2) Similarly, if an individual is holding foreign assets such as investments in stocks listed in the US, then he/she has to report all his assets and liabilities irrespective of total income in a financial year. An individual having foreign assets or who is a beneficiary of any asset or having signing authority in any account located outside India is mandatorily required to file ITR even if his/her gross total income is below the basic income exemption limit.

This second point is the reason why the question about reporting crypto holdings in ITR arises. This is because there is no clarity on whether crypto holdings are classified as Indian or foreign assets. In case it is the latter, then reporting these holdings in one's ITR would be needed irrespective of the income level of the investor.

ET Wealth online spoke to five tax experts to find out whether holdings in cryptocurrencies is required to be reported by individuals while filing ITR for FY2020-21. Here's what they have to say:

S. Vasudevan, Executive Partner, Lakshmikumaran & Sridharan Attorneys, an Indian law firm specializing in taxation matters, says, "There are no clear guidelines available from the tax authorities on treatment of cryptocurrency. As cryptos have not yet been granted the status of a legal tender in India, it will most likely to be treated as an asset or a commodity. It will qualify as an investment or stock-in-trade depending on the nature of activity and intent of the individual. For instance, it will be stock-in-trade in the hands of an individual who carries out frequent trading in cryptos as a business and income from such trading may be taxable as business income. On the other hand, it may be a long-term or short-term capital asset in the hands of an investor and income from sale of such asset may be taxed as capital gains. Treatment may be different in the hands of an individual who is engaged in the business of mining of cryptos. All individuals, who are engaged in the business of mining or trading, will have to disclose the cryptos held by them as stock-in-trade on March 31, 2021 in their ITR. Further, any crypto held as investment will have to be disclosed in ITR by individuals, who are subject to tax audit. Significantly, there is no clarity as to whether crypto will qualify as Indian or foreign asset. In case crypto is treated as a foreign asset, all residents will have to disclose their holdings in the ITR, irrespective of their income limits. Any failure to disclose foreign assets may expose the individuals to stringent proceedings under the Black Money Act."

Sujit Bangar, EX-IRS officer and founder of TaxBuddy.com, an ITR filing website says, "Government has not given any special instructions regarding taxation of bitcoins or cryptocurrency related gains/profits. Therefore, general rules from Income Tax Act regarding sell-purchase of any asset, like gold for example, would be applicable to bitcoins/cryptocurrency. Income derived from the sale of cryptocurrencies can be classified as either capital gains or business income. It depends on whether the portfolio is maintained as investment or trading. When one sells bitcoins/cryptocurrency held as investment, the gains are to be reported as 'income from capital gains'. If one held cryptocurrency for less than 36 months, then the gains/loss will be short term and in case it is held for more than 36 months, then the gains/losses shall be long-term. Even capital gain deduction under section 54F can be availed against LTCG from cryptocurrency gains if gain is invested in residential property. If nature of transaction of sale, purchase of bitcoins is of trading, then income from this sale, can be treated as business income and can be taxed accordingly. If there is loss, this can be carried forward just like normal business loss. The reporting of cryptocurrency holding as an asset in ITR is required if the taxpayer is holding cryptocurrency and taxable income is exceeding Rs 50 lakh. We have to fill Schedule - AL containing details of Assets & liabilities if taxpayer having income over 50 lakhs in a year and held crypto currency as an Asset. There is no clarity regarding how to determine whether cryptocurrency is an Indian or foreign asset. However, one way to determine it whether the exchange from which cryptocurrency is bought is based in India or abroad. If it is based in India then, then it can be considered as Indian asset. However, if the exchange is outside India, then your cryptocurrency holdings can be considered as foreign assets which are mandatorily required to be reported in ITR irrespective of income level. This is similar to fund of funds schemes of mutual funds where India-based mutual fund invests in foreign based funds or index schemes. Such schemes are not required to be reported in ITR by an individual. On the other hand, direct investment in US stocks are required to be reported in ITR."

Rashmi Deshpande, Partner, Khaitan & Co., a practising lawyer says, "If an individual is into substantial trading of cryptos, he/she may have to treat the income as business gains. Accordingly, she will be liable to income tax under the category of business income. However, if the trades are not frequent and there is no movement for a long time, the income may get termed as capital gains. Even if there is one time purchase and no further movement, the individual will have to show it in the ITR as capital assets subject to the requirement of disclosing assets on an individual basis. There is no express clarity from the income tax authorities on whether crypto assets can be treated as capital assets or something else. Therefore, till such clarity is obtained, it is better to treat the crypto assets as capital assets."

Amarpal Chadha, Tax Partner and India Mobility Leader, EY says, "There is a reporting requirement in the Asset & Liability Schedule of the ITR in respect of specified assets, along with the cost of acquisition and related liability, applicable to taxpayers who have income exceeding Rs 50 lakhs in a fiscal year. There is ambiguity as to whether cryptocurrency qualifies as a specified asset like 'shares and securities' or 'cash in hand' to trigger such reporting and if yes, in which line item of the said schedule the taxpayer has to report the cryptocurrency. Further, for taxpayers who qualify as Resident and Ordinary Residents, overseas assets and income are required to be reported in the Foreign Asset Schedule of the ITR. Whether cryptocurrency qualifies as a foreign asset or income from such cryptocurrency as foreign income, are points which are not specifically provided in the tax laws or clarified by the CBDT. Considering the tax and penal consequences under the tax laws and the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, it may be prudent for taxpayers to disclose the cryptocurrency holdings in the foreign asset or income schedule. There is no income threshold (like in case of Asset & Liability Schedule) for reporting in the Foreign Asset Schedule".

One of the chartered accountants who did not wish to be quoted said that there is no clarity regarding whether cryptocurrency is an Indian asset or foreign asset. One way to determine this is where the servers exist. If the servers exist outside India, then it can be considered as foreign asset. As per income tax laws, foreign assets are required to be reported in ITR irrespective of income level. However, there is no specific schedule under which cryptocurrency holdings can be reported in this year's ITR forms. If you are someone who has cryptocurrency holdings, then it would be prudent for individuals to still report cryptocurrency holdings while filing their ITR for FY2020-21 so as to avoid penal consequences in the future. The reporting shall be made in Schedule FA.