Reporting Virtual Digital Assets (VDA) while filing your income tax return (ITR) is a monumental task because the transaction data is a chaotic mess, scattered across multiple exchanges, wallets, and blockchains. This makes consolidating your trades and finding the correct cost of acquisition the single biggest hurdle for investors.
“The major concern in reporting VDA is getting the correct cost of acquisition. For those who may have done a few trades, it’s not difficult, but in the case of a bulk of transactions done across multiple platforms, it’s difficult to retrieve,” said Niyati Shah, a chartered accountant (CA) and vertical head of personal tax at 1 Finance.
For those with a large volume of transactions, retrieving accurate data across multiple platforms is a significant challenge.
Incorrect VDA reporting can draw unwanted attention from the taxman. In June, the tax department sent notices to thousands of taxpayers after data from exchanges revealed mismatches with their tax returns. For those with a large volume of transactions, specialized crypto tax platforms that aggregate data can provide a crucial solution for generating accurate tax reports.
In India, three platforms stand out: KoinX, Koinly, and Crypto Tax Calculator. They are designed to generate tax reports that comply with Indian tax laws.
How crypto tax platforms work
These platforms streamline the reporting process by connecting directly to your exchanges and wallets.
Punit Agarwal, founder of KoinX, explains, users simply log in, select the platforms they’ve used, and provide the public addresses of their wallets. The software then automatically imports transactions, calculates gains and losses, and prepares a tax report.
These platforms have partnerships with all major Indian exchanges and most global ones, though they may not support smaller blockchains.
The platforms use the First In, First Out (Fifo) method to calculate gains, which is aligned with the Indian tax system, Agarwal added. The method assumes that the first coins you bought are the first ones you sold, helping to determine the correct purchase cost for calculating your gains.
While all three platforms are designed for Indian users, they differ in their features and suitability for various types of traders.
For instance, Koinly segregates different types of transactions that helps to report them under the right Schedule in ITR, said Sonu Jain, a chartered accountant, who specialises in cryptocurrency taxation.
“The report will segregate capital gains, F&O and other income. The first includes spot trading, P2P transactions and any VDAs that are sold, which are taxed at 30%. Airdrops, gifted cryptocurrencies and mining income are to be reported as Income from Other Sources and both these are taxed at slab rates, Jain explained.
“Koinly gives a summary of these categories, whereas KoinX gives a standard VDA report that doesn’t segregate the income heads. In the case of the latter, the user needs to especially search for a complete report, which is a lengthier process than Koinly,” he added.
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Accuracy for complex transactions
While these platforms reliably capture basic trade data, CAs and traders who use them for clients note that complex blockchain-only transactions, such as liquidity mining, staking rewards, and airdrops, can sometimes be missed.
An airdrop is the distribution of free tokens by an exchange or blockchain to its users, while staking rewards are additional tokens earned by locking up existing VDAs with a blockchain.
Himank Singla, partner at S B H S & Associates, Chartered Accountants, said 20% of his clients deal in cryptocurrencies and he has been using KoinX for two years for their VDA reporting. He claims a 100% accuracy rate so far.
“All the VDA transactions that are shown in the TDS report and Form26AS are captured by KoinX. The sale value in Form26AS and KoinX tax report has always matched in our case,” he said, adding that his clients are primarily involved in spot trading activities and the exchanges they use are supported by KoinX.
However, the real complexity arises with blockchain transactions.
Jain said KoinX is a good option for those who primarily deal in Indian exchanges or even global exchanges that it supports.
“For seasoned traders who engage in nuanced activities like airdrop mining and lend to liquidity pools, the platforms can sometimes miss identifying the transaction correctly and result in miscalculating tax. I have seen instances where KoinX has missed fetching airdrop events that happen on small blockchains,” he said, adding that for large exchanges and blockchains, KoinX works fine.
A prime example of this complexity is lending to liquidity pools.
In traditional stock markets, large institutions act as market makers. On the blockchain, since there are no intermediaries, liquidity is managed through automated smart contracts called liquidity pools. Users deposit their coins into the pool, which are used to facilitate trading, and in return, they earn a share of the trading fees.
From a tax perspective, this creates a significant challenge. When you provide liquidity, your VDAs leave your wallet, but they are not actually sold. If the platform incorrectly tags this as a sale, you could be taxed at 30% even though you haven’t sold the coin. For example, if you pooled a coin worth ₹10 lakh and it’s incorrectly tagged as a sale, you would have to pay ₹3 lakh in tax. When you eventually sell the coin, you would again pay 30% tax on the gain.
“Koinly and Crypto Tax Calculator automatically tag such transactions, while KoinX doesn’t yet automate this step,” said Jain.
For complex transactions such as this, Koinly and Crypto Tax Calculator are known to be more accurate compared to KoinX.
Singla said that while preparing a tax report for a full time crypto trader, KoinX did not support some of the lesser known blockchains he had transacted on. “The alternative was to manually prepare a report, upload it on KoinX and tag the different types of transactions under their respective categories. We decided to not file ITR for him as we don’t want to risk filing incorrect ITR,” he said.
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Making the right choice
Experts say that since Koinly and Crypto Tax Calculator are global companies, they support a higher number of global exchanges, wallets and blockchains.
KoinX is a good option for domestic platforms and popular global exchanges. Jain said Crypto Tax Calculator is more suited for those engaged in advanced activities like mining, staking and liquidity pool loaning as the platform is especially designed for such activities. For others, KoinX and Koinly are a better option.
In any case, it is advised that the taxpayer carefully reviews the tax report to ensure they are correctly categorised under the right income head.
Shah said she has used CoinTracker in the past for reporting VDA for her clients, which was an accurate tool for fetching data from global exchanges. CoinTracker discontinued its Indian vertical last year, so now it may not be feasible for Indian users as the pricing is in US dollars and the tax reports are generated as per US tax laws.
Pricing for these platforms differs based on transaction volume. Crypto Tax Calculator is the most affordable, starting at ₹200 for up to 100 transactions. Koinly charges ₹490, while KoinX costs around ₹830 for the same limit.
Both Koinly and KoinX require a subscription per financial year, whereas Crypto Tax Calculator charges a one-time annual fee and lets you generate reports for multiple financial years.
Reporting VDAs in your ITR
After consolidating your transactions, crypto gains must be reported under Schedule VDA in your ITR. Each individual sale made during the financial year requires four details: purchase date, purchase cost, sale date, and sale value.
You can report VDAs either manually through the online utility, or via the Excel-based offline utility. For those with a large number of trades, the offline utility is the better option as it allows for copying and pasting large volumes of data from the crypto tax reports. Once the Excel utility is filled, you can submit it to the tax portal.
