How to Report Virtual Digital Assets in ITR-2 and ITR-3

The Indian taxation system has undergone significant changes in the last few years, especially when it comes to Virtual Digital Assets (VDAs) like cryptocurrencies, NFTs, and tokens. Since the Union Budget of 2022, income from trading or investing in VDAs has been clearly classified and taxed under specific provisions.

Now, taxpayers who earn income from VDAs must report them in their Income Tax Returns (ITR) — specifically in ITR-2 and ITR-3, depending on the nature of their income. With stricter compliance rules and penalties for non-disclosure, understanding how to correctly file these returns has become crucial.

In this article, we’ll explore everything you need to know about reporting VDAs in ITR-2 and ITR-3, including tax rules, reporting process, examples, and compliance strategies.

Understanding Virtual Digital Assets (VDAs)

Before diving into reporting requirements, let’s clarify what VDAs include under Indian tax law.

According to Section 2(47A) of the Income Tax Act:

• Cryptocurrencies like Bitcoin, Ethereum, Solana, and others

• Non-Fungible Tokens (NFTs)

• Any token or asset generated through blockchain technology

All of the above fall under the VDA category.

Key point: Profits from buying, selling, or transferring VDAs are taxed at 30% (plus surcharge and cess) under Section 115BBH, and every transaction is also subject to 1% TDS under Section 194S.

Who Should File ITR-2 vs ITR-3?

• ITR-2: For individuals and Hindu Undivided Families (HUFs) who earn income from salary, house property, capital gains, and VDAs as investments (capital gains).

• ITR-3: For individuals and HUFs who earn income from business or profession, including frequent trading of VDAs (classified as business income).

So, the choice depends on how you treat your VDA activity:

• Occasional buying/selling = ITR-2 (capital gains)

• Regular trading/mining/crypto business = ITR-3 (business income)

Step-by-Step Guide to Reporting VDAs in ITR-2

If you’re an investor (not a full-time trader), you’ll likely use ITR-2.

1. Select the Correct ITR Form

When filing online via the income tax portal, choose ITR-2 for AY 2025-26 if your VDA income is under “Capital Gains.”

2. Go to the “Schedule VDA” Section

CBDT introduced a separate Schedule VDA in ITR forms starting from AY 2023-24. This is where all transactions related to VDAs must be reported.

3. Report Transaction-Wise Details

You must enter details for each VDA transaction during the financial year, including:

• Date of acquisition

• Date of transfer

• Cost of acquisition

• Sale consideration

• Transfer expenses (if any)

• Net gain or loss

4. Tax Calculation

• All gains are taxed at 30% flat rate.

• No deduction for expenses (except cost of acquisition).

• Losses from VDAs cannot be set off against other income (like stocks or salary).

• No carry-forward of VDA losses to future years.

5. Final Verification

Once filled, verify that Schedule VDA total is reflected in Schedule CG (Capital Gains) and ensure tax liability is updated.

Step-by-Step Guide to Reporting VDAs in ITR-3

If you are a trader or earn business income from crypto, you’ll need ITR-3.

1. Select the Correct ITR Form

Choose ITR-3 when filing if your VDA activity qualifies as business income.

2. Reporting in “Profit and Gains from Business or Profession”

Here, VDAs are reported under Income from Business/Profession.

3. Maintain Books of Accounts

Since trading/mining is a business, you must maintain:

• Ledger of transactions

• Expenses directly related to crypto trading (internet charges, electricity for mining, etc.)

• Proof of trades via exchange statements

4. Tax Treatment

• Flat 30% tax on profits (same as ITR-2).

• No set-off of losses against other income.

• No carry-forward allowed.

5. Audit Requirement

If VDA trading is your primary business and turnover exceeds the prescribed limit, a tax audit may be applicable under Section 44AB.

Example of Reporting VDA in ITR

Imagine you purchased Ethereum worth ₹1,00,000 in June 2024 and sold it in December 2024 for ₹1,50,000.

• Cost of Acquisition: ₹1,00,000

• Sale Value: ₹1,50,000

• Profit: ₹50,000

Now, here’s how it is taxed:

• Flat tax @ 30% = ₹15,000

• Surcharge (if applicable) + 4% cess

• Final Tax Payable ≈ ₹15,600

This transaction must be reported under Schedule VDA in ITR-2 if you’re an investor.

Shareholding Pattern vs Individual Reporting

Unlike listed companies (where shareholding patterns are declared), individuals must self-declare VDA holdings in their ITR. Non-reporting or underreporting can attract:

• Penalty equal to tax evaded

• Prosecution in extreme cases

Hence, transparency is key.

Common Mistakes to Avoid When Reporting VDAs

1. Not reporting losses – Even if losses cannot be set off, you must still report them.

2. Missing TDS credit – Ensure 1% TDS deducted by exchanges is reflected in Form 26AS.

3. Mixing crypto with stock gains – Stocks are taxed differently (short/long-term), while crypto has a fixed 30% rate.

4. Reporting in the wrong ITR form – Investors should not file ITR-3 unless treating it as a business.

5. Ignoring foreign wallets/exchanges – Global VDA holdings must also be disclosed.

Role of AI Platforms in Managing Crypto Taxes

With hundreds of transactions across wallets and exchanges, manually calculating gains can be overwhelming. This is where AI-based platforms like Rikdom Bitrad come into play. By automatically tracking trades, profits, and taxes, such tools reduce errors and help investors stay compliant while focusing on maximizing returns.

Similarly, platforms like https://rikdombitrad.com/ showcase how intelligent automation can simplify crypto investing while ensuring tax readiness.

Investment Advice for VDA Taxpayers

• Keep Detailed Records: Always download and save transaction reports from exchanges.

• Plan Cash Flow for Taxes: Set aside 30% of your profits for tax at the time of booking.

• Diversify Portfolio: Don’t rely only on one coin; spread across assets for risk management.

• Use Professional Help: A CA specializing in crypto taxation can optimize your compliance strategy.

• Stay Updated: Tax laws for VDAs may evolve further with global regulations.

Should You Treat VDA Income as Capital Gains or Business?

This is a common dilemma. Here’s a simplified rule of thumb:

• Occasional investments → ITR-2 (Capital Gains)

• High-frequency trading/mining → ITR-3 (Business Income)

Consult a tax professional if you are in doubt, since misclassification may trigger scrutiny.

Conclusion

Reporting Virtual Digital Assets (VDAs) in ITR-2 and ITR-3 is no longer optional but mandatory for Indian taxpayers. The government has created clear guidelines, and penalties for non-disclosure can be severe.

By using Schedule VDA in ITR-2 (for investors) or reporting under Business Income in ITR-3 (for traders), you can ensure full compliance.

As the crypto ecosystem expands, leveraging automation tools and professional advice will make tax reporting smoother and error-free.

Frequently Asked Questions (FAQs)

1. Which ITR form should I use for crypto income?
Use ITR-2 if it is treated as capital gains, and ITR-3 if treated as business income.

2. Are crypto gains taxed like stocks?
No, crypto (VDA) gains are taxed at 30% flat rate, unlike stocks which depend on short/long-term classification.

3. Can I offset VDA losses with other income?
No, VDA losses cannot be set off against any other income nor carried forward.

4. Do I need to pay TDS on every crypto trade?
Yes, 1% TDS is deducted by exchanges on transactions above ₹50,000 (₹10,000 in some cases).

5. What if I don’t report crypto in my ITR?
Non-reporting can lead to penalties, interest, and even prosecution in extreme cases.

6. Are foreign crypto holdings taxable?
Yes, if you are a resident Indian, global VDA income is taxable in India.

7. Can I show mining income in ITR-2?
No, mining is considered a business activity, so it must be reported in ITR-3.

8. Will tax rates for VDAs reduce in the future?
Industry bodies are requesting lower rates, but until notified, 30% remains applicable.

9. How do AI tools help with crypto tax filing?
They track trades across multiple wallets/exchanges, calculate profits, and prepare tax-ready data.

10. Do I need a CA for filing VDA income?
While not mandatory, consulting a crypto-specialized CA ensures compliance and reduces risks.