Undisclosed crypto income: Respond to taxman's notice, file revised return

Underreporting or misreporting crypto income can lead to penalties ranging from 50 to 200%, even imprisonment of up to seven years

The Income-Tax (I-T) Department has detected widespread tax evasion involving cryptocurrencies and, according to media reports, has issued emails to thousands of defaulting taxpayers seeking transaction details. Investors must understand the tax rules governing crypto assets and respond promptly to these emails.

 

How evasion is detected

 

The department gathers data on cryptocurrency activity from several sources. “Reporting agencies such as cryptocurrency exch­anges and banks are obligated to report transactions through the Statement of Financial Transactions (SFT) to the tax department. Since July 1, 2022, TDS deduction is applicable on crypto tran­sfers, which serves as a direct repo­rting to the I-T Department,” says Preeti Sharma, partner, global employer services, tax & regulatory services, BDO India.

 

Mandatory know your custo­mer (KYC) norms (PAN or Aadh­aar submission) help trace tra­­nsactions. Large or frequent crypto-linked deposits or withdrawals also trigger scrutiny. “The government employs data analytics to identify discrepan­cies and send notices, urging taxpayers to update their ITRs,” says Shefali Mundra, tax expert at ClearTax. 

 

TDS and taxation rules

 

TDS under Section 194S of the I-T Act applies to any buyer paying for the transfer of a virtual digital asset (VDA), including cryptocurrencies. “If a VDA sale transaction is done over an Indian exchange, the exchange deducts the 

 

TDS while transferring the amount from the buyer to the seller,” says Sharma. Crypto 

 

transactions must be reported under Schedule VDA of ITR-2 or ITR-3. “Profits from trading, selling or transferring cryptocurrencies is taxed at a flat rate of 30 per cent (plus applicable surcharge and education cess),” says Suresh Sur­ana, a Mumbai-based chartered accountant.

 

Only the cost of acquisition may be deducted. “No set-off of loss from VDAs against any other income is allowed. Any such loss is also not allowed to be carried forward,” says Sharma.  According to Surana, these are major restrictions as they prevent investors from reducing their overall tax liability.

 

Respond to department’s email 

 

First, confirm the authenticity of the email. “Genuine emails from the department typically originate from domains such as @inco­metax.gov.in or @gov.in,” says Surana.

 

Identify the relevant section under which the notice was iss­ued to be able to frame an appropriate reply. “Collect all relevant documents and submit your reply through the official income tax portal. Upload the supporting documents and adhere to the deadlines mentioned in the notice,” says Surana.

 

Revise past returns

 

Crypto investors may revise past returns if they failed to report gains. “Section 139(5) of the I-T Act allows taxpayers to file a revised return in case of omissions or mistakes, including failure to disclose crypto gains, provided it is done within the permitted timeline, that is, either three months before the end of the relevant assessment year, or before the assessment is completed, whichever is earlier,” says Ekta Rai, advocate, Delhi High Court. If this deadline is mis­sed, Section 139(8A) permits taxpayers to file an updated return within 48 months from the end of the relevant assessment year, though this involves paying additional tax.

 

Penalties for non-disclosure

 

Non-disclosure of crypto income can result in steep penalties. “Underreporting or misreporting of income can result in a penalty ranging from 50 to 200 per cent of the tax due, with the possibility of imprisonment for up to seven years,” says Mundra. Those with cryptocurrencies in foreign wallets or exchanges must disclose them under Schedule FA. “Skipping this opens you up to far more serious trouble under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015,” says Rai.

 

Maintain comprehensive documentation

 

• Transaction logs should include date of acquisition and sale, quantity, price, mode of payment, and exchange/platform used
• Keep proof of acquisition such as purchase invoices, bank statements, or platform-generated order history
• For sales, have documents like sale invoices, transaction confirmations, exchange summaries, and bank statements showing receipt of proceeds
• Preserve TDS-related records, such as Form 16A