cryptocurrency tax: Crypto investors seek clarity in reporting assets in IT returns
Having moved the coins offshore using the Blockchain network to avoid suffocating regulations, they have felt that sharing the information with the Income Tax (IT) authorities could present as much trouble as hiding it.
Declaring their crypto holdings – originally purchased on Indian exchanges and now parked in wallets with foreign exchanges – in the ‘Foreign Assets (FA) schedule would be an indirect admission of having made a transaction that may be in violation of the Foreign Exchange Management Act ( FEMA). However, a non-disclosure of a “foreign asset” could put them on the wrong side of black money (Undisclosed Foreign Income and Assets) and the imposition of the tax law – a strict law that came into force in 2015 and can be used to impose criminal sanctions. (As per the FA Schedule, an assessee has to provide details of foreign assets or income from any source outside India in a specific section of the ITR).
Technician vs tax man
Interestingly, given the nature of cryptos, which are different from ordinary assets such as bank accounts, real estate and securities, the taxpayer’s dilemma may also put the tax office as well as practitioners in uncharted territory.
“Reporting of cryptoassets is fraught with problems – there are several aspects such as identification of location, situs that are relevant. Two main theories of situs are: First, it is located where the owner of the cryptoasset is located, in that case for resident taxpayers. , cannot crypto be treated as foreign assets – and therefore no reporting is required in Schedule FA; secondly, where the wallet containing crypto assets is located (this may be offshore and may therefore require reporting).Some nations have come out with guidance in this connection. Though tax rates are prescribed under Indian Income Tax laws, clarity is still awaited on this aspect,” said Ashish Mehta, partner at law firm Khaitan & Co.
But this is a difficult terrain that can put technologists and taxman in conflict. For the former, wallet locations cannot be geographically defined: wallets are accessible through Blockchain (the shared database or ledger that is the backbone of the crypto world), which in turn can be accessed over the Internet. And since Blockchain is a network of computers that can be located in different countries, how can one find the location of a wallet. For a technician, a crypto wallet is like an email account, which can be accessed regardless of the user’s location.
But tax and FEMA experts believe such crypto transfers could come back to bite investors. “Moving crypto from Indian wallet to overseas wallet itself is prohibited as it requires prior approval. One has to consider on whose advice the crypto was moved offshore,” said Rajesh Shah, partner at CA firm of Jayantilal Thakkar & Company. According to Moin Ladha, Partner at Khaitan & Co, “Transfer of an asset abroad will be treated as a capital account transaction. Since capital account transactions are only permitted with a general or special permission and there is information sharing between regulators, due compliance should be ensured to avoid any subsequent problems.”
When cryptos purchased with the local currency are moved to a wallet opened with an “overseas” exchange, it boils down to cross-border movement of funds in the form of cryptocurrency.
According to market circles, most large investors who have transferred their coins “offshore” are likely to have done so with the intention of not disclosing them – a strategy that could backfire with the Enforcement Directorate reviewing data obtained from exchanges and any major crypto moves likely . to catch their attention. But if they do disclose, it’s only a matter of time before the IT department shares the data with the ED – which it usually does.
In addition to the FA schedule, taxpayers with income above ₹ 50 lakh a year must also declare their domestic investments separately in the ITR. “Some HNIs, even after transferring their cryptos abroad, have declared these assets as domestic investments in ITR. The IT department does not care where and how the cryptos are held and the ED may never find out – in at least that’s what they’re hoping for,” another person said.
