Crypto tax notices: File revised return before assessment, update later

Once search or survey begins, even updated return may not be allowed

The Finance Ministry has flagged more than 44,000 taxpayers for failing to report virtual digital asset (VDA) transactions in their income-tax returns. If you have invested in cryptos, here is what you need to know to keep the taxman at bay.

 

Disclosure norms

 

Schedule VDA requires taxpayers to report every VDA transfer during the year, including the acquisition date, transfer date, tax head, cost of acquisition, sale consideration, and resulting income.

 

TDS–ITR mismatch triggers scrutiny

 

When VDAs are traded or sold through a registered virtual asset service provider (VASP), TDS under Section 194S of the Income-Tax Act, 1961, is reported by the VASP and reflected in the Annual Information Statement (AIS) and Form 26AS. This data is matched with disclosures in the income-tax return (ITR).

 

“Mismatches arise when TDS appears in AIS or Form 26AS, but the related VDA income is not reported in Schedule VDA, or when the taxpayer claims more TDS credit than reflected in the system,” says Sumeet Hemkar, partner, Deloitte India.

 

“These alerts are typically triggered when discrepancies exceed about Rs 1 lakh,” says Rony Antony, partner and leader – direct tax: south, tax and regulatory advisory, BDO India.

 

Calculating cost and capital gains

 

Taxpayers must track the actual cost of each unit using trade records, wallet logs and broker statements, and match each sale with its purchase. First-in-first-out (FIFO) is commonly followed, though not prescribed. “For foreign-platform trades, the INR-converted purchase price becomes the cost. Precise valuation on each buy and sell date is essential to avoid mismatches in TDS data and Schedule VDA reporting,” says Hemkar.

 

In cross-exchange transfers, even though some exchanges deduct TDS, such movements may not constitute a ‘transfer’ under Section 2(47) of the Income-Tax Act. “Taxpayers should determine whether the transaction is merely a self-transfer before computing any capital gain,” says Antony.

 

Reporting for overseas cryptos

 

For individuals who are resident and ordinarily resident (ROR), all foreign-held cryptos must be disclosed in Schedule FA. “Crypto is treated as an asset. Schedule FA applies to any foreign asset held at any time during the year. Income or gains from such VDAs must also be reported separately in Schedule VDA, creating a dual reporting requirement,” says Vishwas Panjiar, founder, SVAS Business Advisors LLP.

 

Handling crypto tax notices

 

On receiving a VDA-related notice, taxpayers should consult a crypto-aware chartered accountant or tax lawyer, identify the issue — non-reporting, mismatch or under-reporting — and compile supporting documentation.

 

“A reconciliation sheet aligning every trade and transfer with the disclosures in the ITR should be prepared. If genuine errors are found, filing a revised or updated return and paying the differential tax and interest can significantly reduce penalties,” says Panjiar.

 

A revised return can be filed before assessment or notice, while an updated return may be filed thereafter. “Once proceedings like search or survey begin, an updated return may not be allowed, and specialised tax or legal advice becomes essential,” says Panjiar.

 

Accurate records, including detailed transaction logs, exchange statements and wallet records showing balances and on-chain history, must be maintained. “Proper records help accurately compute VDA income, support ITR disclosures, and reduce the risk of transactions being treated as unexplained under Section 69A,” says Sofiya Syed, senior tax manager, direct tax division, Dewan PN Chopra & Co.

 

Penalties for non- or under-reporting

 

Failure to report VDA income or assets can attract severe penalties under the Income-Tax Act, 1961 and, for foreign assets, the Black Money Act, 2015.

 

“Undisclosed foreign crypto may attract a flat 30 per cent tax plus a penalty up to three times the tax, or about Rs 10 lakh for unreported assets, with possible imprisonment of six months to 10 years for deliberate concealment,” says Panjiar.

 

“When VDA gains or assets are not reported, the Income-Tax Department may classify them as unexplained income under Sections 69A and 115BBE, taxing them at 60 per cent plus surcharge and cess — effectively around 78 per cent — with no deductions or set-offs allowed,” adds Syed.

 

The writer is a Delhi-based independent journalist

Tax rates for VDAs

 

· Gains on VDAs are taxed at a flat 30 per cent

 

· This rate applies irrespective of holding period

 

· In addition, surcharge and 4 per cent cess apply

 

· No deductions are permitted other than acquisition cost