Cryptocurrency Tax: Crypto Investors Seek Clarification on Reporting Assets in IT Filings

Cryptocurrency Tax: Crypto Investors Seek Clarification on Reporting Assets in IT Filings
Wealthy Indian investors who moved their crypto holdings to wallets with exchanges and vaults overseas to escape a hostile regime at home are in a Catch22 situation – unsure whether to disclose these “assets. virtual digital” in their tax returns (ITR).

After moving the coins overseas using the Blockchain network to avoid suffocating regulations, they felt that sharing information with income tax (IT) authorities could cause as many problems as hide them.

Declaring their crypto holdings – originally purchased on Indian exchanges and now parked in wallets with foreign exchanges – in the “Foreign Assets (FA)” program would be an indirect admission of having undertaken a transaction that may be in violation of the Foreign Exchange Management Act (FEMA). However, failure to disclose a “foreign asset” could put them on the wrong side of the Black Money (Undisclosed Foreign Income and Assets) and Taxation Act – a tough law that came into effect. in force in 2015 and can be used to impose criminal sanctions. (Under Schedule FA, an assessee must provide details of foreign assets or income from any source outside India in a specific section of the ITR).


Technician against the taxman

Interestingly, however, given the nature of cryptos, which are different from ordinary assets like bank accounts, properties, and securities, the dilemma for taxpayers could also place the tax office as well as practitioners in uncharted territory.

“Declaration of crypto assets is fraught with pitfalls – there are several aspects like location identification, situs that are relevant. Two major theories about situs are: firstly, it is located where the ownership of the crypto assets, in which case for resident taxpayers, the cryptos may not be treated as foreign assets – and therefore no Schedule FA reporting is required; second, where is the wallet that holds the crypto assets (this may be offshore and therefore may require reporting). Although the tax rates have been prescribed by Indian income tax laws, clarification on this aspect is still awaited,” Ashish said. Mehta, a partner at law firm Khaitan & Co.

But it is a delicate terrain that could put technicians and the tax authorities at loggerheads. For the former, wallet locations cannot be geographically defined: wallets are accessible through the Blockchain (the shared database or ledger that is the backbone of the crypto world), which in turn is accessible via Internet. And, since the Blockchain is a network of computers that can be located in different countries, how then to pinpoint the location of a wallet. For a technician, a crypto wallet is like an email account, which can be accessed regardless of where the user is.

But tax experts and FEMA believe such crypto transfers could come back to bite investors. “The movement of crypto from the Indian wallet to the foreign wallet per se is prohibited as it requires prior approval. One must assess on whose advice the crypto has been moved overseas,” said Rajesh Shah, Partner. of the company CA partner of Jayantilal Thakkar & Company. . According to Moin Ladha, Partner at Khaitan & Co, “The transfer of an asset overseas would be treated as a capital account transaction. Since capital account transactions are only permitted with a general authorization or special event and that there is information sharing between regulators, compliance must be ensured to avoid any subsequent problems.”

When cryptos purchased with local currency are moved to an open wallet with an “overseas” exchange, it boils down to a cross-border movement of funds in the form of cryptocurrency.

According to Market Circles, most large investors who moved their coins “overseas” likely did so with the intention of not disclosing them — a strategy that can backfire on the Enforcement Branch. laws passing through data obtained from exchanges, and any major crypto movement is likely to catch their attention. But if they do leak, it’s only a matter of time for IT to share the data with ED – which they usually do.

Apart from the FA schedule, taxpayers with an income above ₹50 lakh per annum must also declare their domestic investments separately in the ITR. “Some HNIs, even after transferring their cryptos overseas, reported those assets as domestic investments in the ITR. IT does not care where and how the cryptos are held, and the ED can never find out – or so they hope,” another person said.


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