I-T notices to cryptocurrency investors on suspicion of tax evasion

The income tax department has also inquired whether the users have brought or sold cryptocurrency from websites registered outside the country

The income tax department has sent notices to thousands of cryptocurrency investors across the country, seeking additional details on the money invested in the virtual currency during the government’s demonetisation exercise.

Among 28 questions in total, the income tax department has sought details on “investment or sales of bitcoins and other cryptocurrencies in India and abroad during 8 November-31 December 2016,” said a notice to cryptocurrency investors on December 20. A cryptocurrency, such as bitcoin, is a virtual currency created and stored electronically using the blockchain technology.

“We have issued notices to cryptocurrency investors in cases where their investment in not in line with the income declared in their returns,” a Central Board of Direct Taxes (CBDT) spokesperson confirmed.

Prime Minister Narendra Modi had announced demonetising old currency notes of Rs 500 and Rs 1,000 on November 8 last year in an attempt to curb black money in the economy. The Union government had asked people to deposit old Rs 500 and Rs 1,000 notes in banks till December 30, 2016.

The income tax department sent the notices to investors a week after it conducted survey operations at major cryptocurrency exchanges across the country on suspicion of alleged tax evasion. During this process, the department sought details of cryptocurrency investors from all exchanges, sources said.

The income tax department has asked for bank statements of investors and their family members for 2015-16, 2016-17 and 2017-18, along with “the computation of loss or gain” arising out of investment in cryptocurrency during these financial years.

The department has also inquired whether the users have brought or sold cryptocurrency from websites registered outside the country and if they have paid any advance taxes against the gains arising out of the investments. “Please furnish details of all transactions in bitcoins and cryptocurrencies from the date you started dealing with them,” the notice said. It further asked if the users had shown the “gains made out of sale of cryptocurrencies as income” in annual income tax returns filed for the present fiscal year and the two preceding years. The finance ministry had last month cautioned investors against trading in cryptocurrencies like bitcoin, and likened such investments to “Ponzi schemes”.

“The VCs [virtual currencies] do not have any intrinsic value and are not backed by any kind of assets. The price of bitcoin and other VCs, therefore, is entirely a matter of mere speculation resulting in spurt and volatility in their prices… Consumers need to be alert and extremely cautious as to avoid getting trapped in such Ponzi schemes,” the finance ministry had said in a statement on December 29.

The income tax department’s survey on cryptocurrency exchanges was aimed at “gathering evidence for establishing the identity of investors and traders, transactions undertaken by them, identity of counterparties, related bank accounts used, among others". The Reserve Bank of India (RBI) has issued three warnings against investing in cryptocurrencies — in December 2013, February 2017, and earlier this month. The department of economic affairs in the finance ministry had also constituted an inter-disciplinary committee to examine the existing global regulatory and legal structures governing bitcoin and other such virtual currencies. The government is examining the committee’s report.