Important Keyword: Crypto Trading, Income Tax Notice, Notice u/s 148, Tax on Cryptocurrency.
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Income Tax Notice for Crypto Trading under Section 148
The Income Tax Department (ITD) has recently sent notices to many crypto traders under Section 148A(b) of the Income Tax Act. These notices target individuals who traded in cryptocurrencies but failed to report these transactions in their Income Tax Returns (ITR) and did not pay the applicable taxes. Let’s break down what these notices mean, how to respond, and the consequences of not reporting crypto income.
What is Section 148 of the Income Tax Act?
Purpose:
- Inquiry: Section 148A serves as a platform for the tax authorities to conduct inquiries before issuing formal notices under Section 148.
- Opportunity to Respond: Clause (b) of Section 148A specifically grants taxpayers the opportunity to present their case and explain why the tax authority should not proceed with issuing a notice under Section 148.
Contents of the Notice:
- Show Cause: Taxpayers are required to demonstrate why the tax authority should refrain from issuing a notice under Section 148 for income that has potentially escaped assessment.
- Time-Bound Response: Taxpayers must submit their response within the stipulated time frame mentioned in the notice.
Issuance of Notice under Section 148
Criteria for Issuance:
- Escaped Assessment: The Assessing Officer (AO) can issue a notice under Section 148 if they have reason to believe that the taxable income of the taxpayer has escaped assessment.
- Prior Approval: Before issuing such a notice, the AO must obtain prior approval from the designated authority.
Responding to the Notice
- Understanding the Allegations: Carefully review the contents of the notice to understand the specific allegations made by the tax authority.
- Gathering Evidence: Collect relevant documents, records, and evidence to support your case.
- Preparing Response: Craft a comprehensive response addressing each allegation raised in the notice.
- Timely Submission: Ensure that your response is submitted within the specified time period mentioned in the notice.
Tax Notice for Crypto Trading under Section 148A(b)
Recently, multiple traders involved in cryptocurrency trading received tax notices under Section 148A(b) for the financial years 2015-16, 2016-17, and 2017-18. These notices contained specific information pertaining to their crypto transactions and required actions to be taken by the recipients. Let’s break down the contents of these notices and what they entail for the bitcoin traders.
Contents of the Tax Notice
Information Included:
- Transaction Value: Details regarding the value of transactions conducted in crypto trading during the specified financial years.
- Financial Year: The relevant financial year(s) for which the notice pertains.
- Unreported Income: Allegations that income from crypto transactions, whether Long-Term Capital Gains (LTCG) or Short-Term Capital Gains (STCG), was not reported.
Actions Required from Bitcoin Traders
Attend ITD Office:
- Traders were instructed to visit the Income Tax Department (ITD) office along with their books of accounts and relevant documents.
Provide Bank Statements:
- Submission of bank statements from all bank accounts, including those belonging to family members, was requested.
Submit Computation of Gain/Loss:
- Traders were required to prepare and submit a computation of the gains or losses arising from their investments in cryptocurrencies during the specified financial years.
Disclosure of Investment Details:
- Declaration of investment details in India and abroad, along with the source of income and trading specifics related to bitcoin and other cryptocurrencies, was mandated.
Declare Crypto Wallet Details:
- Submission of details regarding crypto wallets held in India and abroad, transactions conducted through these wallets, and the source of funds deposited into them was necessary.
Response Submission:
- Respondents were expected to submit a comprehensive response addressing all allegations within the stipulated time frame provided in the notice.
How does Income Tax Department know about my cryptocurrency trading?
The Income Tax Department (ITD) has employed various data collection methods to scrutinize cryptocurrency trading activities in India. Let’s delve into how the ITD gathered information on crypto traders and subsequently issued tax notices to individuals with significant crypto transactions.
PAN Requirement by Cryptocurrency Exchanges
Data Collection: Cryptocurrency exchanges in India typically request the Permanent Account Number (PAN) of traders during the account setup process for crypto trading.
Data Analysis: The ITD collated and meticulously analyzed the PAN data obtained from major cryptocurrency exchanges. This comprehensive data analysis enabled the tax authorities to identify individuals engaged in substantial crypto transactions.
Insight Portal and Circular by CBDT
Data Upload: The ITD received additional data on crypto trading activities through the VRU/CRIU functionality on the Insight Portal of Income Tax. This functionality allowed the uploading of information related to income escaping assessment and bulk transactions, such as penny stock transactions.
Circular Issuance: On 10th December 2021, the Central Board of Direct Taxes (CBDT) issued a circular to commissioners of income tax, instructing them to upload relevant information on the Insight Portal. This circular outlined procedures for uploading data via the VRU/CRIU functionality, facilitating the issuance of notices under Section 148 of the Income Tax Act.
Issuance of Tax Notices
Notice Under Section 148A(b): Leveraging the data collected through various channels, the ITD issued notices to numerous crypto traders under Section 148A(b) of the Income Tax Act. These notices served as a mechanism for the tax authorities to address potential cases of income escaping assessment in the realm of cryptocurrency trading.
Penalty on tax notice for crypto trading u/s 148
Traders engaged in cryptocurrency, NFT (Non-Fungible Token), or VDA (Virtual Digital Asset) trading are subject to tax liability under Section 115BBH, introduced in Budget 2022 and applicable from FY 2022-23. This mandates reporting crypto trading income as capital gains in the Income Tax Return (ITR) and paying a 30% tax on profits.
Compliance Challenges
In previous years, the absence of specific provisions led many traders to overlook reporting crypto trading income and fulfilling tax obligations. Consequently, the Assessing Officer (AO) holds the authority to initiate assessment or reassessment proceedings by issuing notices under Section 148 of the Income Tax Act.
Penalties Imposed by AO
The AO can levy penalties under the following circumstances:
- Underreported Income: If the income assessed by the AO exceeds the income reported by the trader in the ITR, a penalty of 50% of the tax payable may be imposed.
- Non-Filing of ITR: If the assessed income surpasses the basic exemption limit and the trader has failed to file the ITR, a penalty of 50% of the tax payable may be levied.
Additional Penalties for Non-Compliance
Apart from tax liabilities, non-compliance with tax regulations may lead to further penalties imposed by the AO. These penalties serve as deterrents to ensure taxpayer compliance and adherence to tax laws.
| Section | Description | Interpretation | Penalty | Imprisonment |
| Sec 272A(1) | Refusal or failure to give evidence or produce books of accounts, etc in compliance with summons under Section 131(1) | If assessee does not produce books of accounts and relevant documents as asked for by AO for notice u/s 148A | INR 10,000 for each failure or default | No Imprisonment |
| Sec 276CC | Failure to furnish ITR in response to notice u/s 148 | If assessee fails to file ITR in response to the notice under Section 148 | No Limit | 6 mth to 7 yrs – If tax liability exceeds INR 25 lacs 3 mth to 2 yrs – other cases |
Reply to tax notice under Section 148 for crypto trading
If you’ve received an income tax notice regarding your crypto trading activities, it’s crucial to respond promptly and appropriately. Here’s how you can submit a response effectively:
- Understand the Notice: Carefully read and comprehend the details mentioned in the income tax notice. Note the deadline for responding and ensure compliance within the stipulated timeframe.
- Justify Transactions and Income Source: In your response, provide a detailed explanation of the nature of your crypto transactions and the source of income. Include relevant documents and books of accounts to support your claims.
- Classify Income Type: Determine whether your crypto trading income should be treated as Capital Gains or Business Income. Assess the frequency and intention behind your trading activities. If you frequently engage in trading for profit-making purposes, consider reporting the income as business income. Alternatively, if your trading activities are sporadic and aimed at long-term investment, classify the income as capital gains.
- Review Previous Tax Filings: If you’ve already reported your crypto trading income in previous Income Tax Returns (ITRs) and paid taxes accordingly, explain this in your response. Provide details of how the transactions were treated in your ITR and the taxes paid on them.
- File Outstanding ITRs: If you hadn’t previously reported your crypto trading income in your ITRs, acknowledge this in your response. Commit to filing the outstanding ITRs promptly, ensuring that all your income, including crypto trading profits, is accurately reported and taxed.
- Submission Method: Choose a suitable method for responding to the notice, such as email or the e-proceedings option available on your account on the income tax website. Ensure that all necessary documents and information are included with your response.
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Official Income Tax Return filing website: https://incometaxindia.gov.in/
