Income Tax Notice for Crypto Trading under Section 148

The Income Tax Department had sent out notices to multiple crypto traders under Section 148A(b) of the Income Tax Act. The ITD issued income tax notices to taxpayers who had indulged in cryptocurrency trading but did not report them in the ITR and pay tax on cryptocurrency trading. Under the tax notice, the department asked the assessee to explain the transactions with supporting documents and books of accounts. The intention is to track the sources of income used for crypto transactions. This is a show-cause notice where the taxpayer needs to justify why the AO should not issue a notice to them u/s 148 for income escaping assessment. Let us understand the tax notice for crypto trading, how to respond, and the penalty if you have not reported crypto income in the ITR.

What is Section 148 of the Income Tax Act?

The ITD has issued notices under clause (b) of Section 148A of the Income Tax Act. Section 148A is the section for conducting inquiry and providing opportunity before issue of notice under Section 148. Clause (b) of Section 148A seeks to provide the taxpayer an opportunity of being heard by serving a show cause notice. The taxpayer needs to explain why the tax authority should not issue a notice under Section 148.

The tax authority issues notice under Section 148 of Income Tax Act where the income has escaped assessment. This is a time bound notice and the taxpayer needs to submit a response within the specified time period. The Assessing Officer i.e. AO can issue notice u.s 148 if:

  • The AO has information that the taxable income of the taxpayer has escaped assessment, and
  • The AO has taken prior approval from the specified authority to issue such notice

Tax Notice for Crypto Trading under Section 148A(b)

Tax notice under Section 148A(b) for crypto trading was issued to multiple traders for FY 2015-16, FY 2016-17, and FY 2017-18. The tax notice comprised of the following information:

  • Value of transactions in crypto trading
  • Relevant financial year
  • The income from crypto transactions was not reported as LTCG or STCG

The bitcoin traders were asked to do the following:

  • Attend the ITD office with books of accounts and other relevant documents.
  • To produce the bank statements of all bank accounts of themselves and family members
  • Submit computation of gain or loss arising out of investments done in the relevant financial year
  • Share investment details in India and abroad, the source of income, and trading details of bitcoin and other cryptocurrencies
  • Declare crypto wallet details in India and abroad, transactions through wallets, and source of money deposited in these wallets
  • Submit a response to the notice within the given time period

How does Income Tax Department know about my cryptocurrency trading?

The cryptocurrency exchanges ask for the PAN of the traders while setting up their accounts for crypto trading. The Income Tax Department collated and analysed this data of bitcoin users from major cryptocurrency exchanges in India. Later, they issued tax notices to crypto traders having significant crypto transactions.

Further, the Income Tax Department received data of crypto trading through the VRU/CRIU functionality on the Insight Portal of Income Tax. CBDT issued a circular on 10th December 2021 to commissioners of income tax to upload information on Insight portal. The Circular had instructions to upload information on VRU/CRIU functionality for issue of notice u/s 148 of Income Tax Act. VRU i.e. Verification Report Upload is a functionality on Insight Portal of Income Tax where information of income escaping assessment is uploaded. CRIU i.e. Case Related Information Upload is a functionality where information of bulk nature such as penny stock transactions, etc is uploaded. On the basis of this information, the ITD issued notices to multiple crypto traders under Section 148A(b) of Income Tax.

Penalty on tax notice for crypto trading u/s 148

A trader having income from trading cryptocurrency, NFT (Non-Fungible Token), or VDA (Virtual Digital Asset) is liable to pay tax at 30% u/s 115BBH. Section 115BBH was introduced in Budget 2022 and is applicable from FY 2022-23. Thus, a crypto trader must report income from crypto trading as capital gains in the ITR and pay tax of 30% on profits.

However, in the absence of any provision in the earlier years, many traders did not report income from crypto trading and did not pay tax. The AO has the authority to open the case for assessment or reassessment by issuing a notice under Section 148 of the Income Tax Act. The AO may also impose a penalty of 50% of tax payable in the following cases:

  • If the income assessed by AO exceeds the income reported by the crypto trader in the ITR
  • If the income assessed by AO exceeds the basic exemption limit if the crypto trader has not filed the ITR

In addition to the tax liability, the AO also has the authority to impose penalty on the failure of compliance at the taxpayer’s end. Below is a summary of penalty that the AO can impose.

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

The crypto trader must respond to the income tax notice within the stipulated time period. You can submit a response as per the instructions mentioned in the tax notice. Submit a response either through email or from the option of e-proceedings on your account on the income tax website.

Section 115BBH for taxation on virtual digital assets would be effective from 1st April 2022 i.e. FY 2022-23 onwards. Since there was no specified tax provision for tax on income from crypto trading for the earlier years, the taxpayer should consider the following while submitting a reply to the tax notice:

  • To submit response to notice under Section 148A, justify the nature of transactions and source of income. Further, provide the relevant documents and books of accounts to the tax officer.
  • Treat the income as Capital Gains or Business Income based on the trader’s intention and the frequency of transactions. Thus, if there were significant trading transactions or the intention is to earn profits, report the income as business income. However, if there were few transactions or the intention is to invest for long-term appreciation, report the income as capital gains.
  • If you had reported the crypto trading income in your ITR and paid tax on it, you can submit a response explaining the nature of transactions and their treatment in the ITR.
  • If you had not reported the crypto trading income in your ITR, you must now file an ITR in response to the notice under Section 148, report all your income, and pay tax on it.

FAQs

Is crypto trading legal in India?

In the Budget 2022 speech, Nirmal Sitharaman clarified that taxing cryptocurrencies do not give them legal status in the country. Thus, the legality of cryptocurrency in India is still under question. However, the government introduced Section 115BBH for the taxation of income from virtual digital assets. Thus, crypto traders must report the trading income in ITR and pay tax at 30% u/s 115BBH.

What is VRU/CRIU in Income Tax?

The income tax officers were asked to upload the information of the crypto trading transactions on the VRU/CRIU functionality on the Insight Portal. VRU i.e. Verification Report Upload is the functionality using which the AOs upload information and verification results for the taxpayers having income escaping assessment from AY 2013-14 to AY 2017-18.
CRIU i.e. Case Related Information Upload is the functionality using which the AOs upload information of bulk nature such as penny stock transactions, beneficiaries in case of entity operators, etc.

What happens if I don’t file my cryptocurrency taxes?

Income from trading in cryptocurrency is a taxable income and must be reported in the Income Tax Return. FY 2022-23 onwards, crypto income must be reported as Capital Gains and tax should be paid at 30% under Section 115BBH of the Income Tax Act. Further, crypto traders cannot claim a deduction of any expenses other than the cost of acquisition. They cannot carry forward the loss to future years.
In the earlier years, if you have not reported your income from crypto trading, the taxman may issue a notice under Section 148 for income escaping assessment.

Tax and Legality of Bitcoin in India

Cryptocurrency is digital money. Cryptocurrency uses something called cryptography to secure its transactions. With the soaring prices, bitcoins have become a hot favorite amongst Indians lately. In this article, we will be discussing the tax on bitcoin. There are a number of cryptocurrencies that have been created such as Bitcoin, Litecoin, Ethereum, Ripple, etc. Under Budget 2022, the finance minister introduced provisions for tax on cryptocurrency, NFT, and VDA. However, in her Budget Speech, Nirmala Sitharaman also clarified that taxing cryptocurrency does not give them legal status in India.

What is Bitcoin?

Bitcoin often described as a cryptocurrency, a virtual currency, or a digital currency – is a type of money that is completely virtual. It’s like an online version of cash. Bitcoin was the first cryptocurrency generated in 2009. Later, other cryptocurrencies such as Ethereum, ripple, litecoin, dash, etc came into existence.

The Bitcoin apps ensure you have a bitcoin wallet that helps in storing and selling bitcoins. The creation of wallets takes place when you sign in and create your account. Balances of Bitcoin tokens are kept using public and private “keys,” which are long strings of numbers and letters linked through the mathematical encryption algorithm that was used to create them.

Generation of Bitcoins

One can obtain the bitcoins in the following ways:

  • Mining
    • Even though bitcoin is a virtual currency, its production incurs real costs. One has to ‘mine’ bitcoins and this process consumes electricity.
    • Every Individual (called the “miner”) has to solve a complicated cryptographic problem and the miner is rewarded with a block of bitcoins.
    • People set up powerful computers just to try and get Bitcoins. This is Bitcoin mining.
    • So, mining is directly proportional to the expense. The competition in solving this complex problem can make the process even more costlier.
  • Buying on an exchange against real Currency
    • You can buy bitcoins from bitcoin exchanges and store them in an online bitcoin wallet in digital form.
    • You can choose any of these Bitcoin exchange platforms – Coinsecure, Zebpay, UnoCoin, etc
    • Bitcoins are purchasable in consideration of real currency.
  • In consideration of goods and services
    • You can use bitcoins (instead of real currency) to buy products and services, but not many shops accept Bitcoin yet and some countries have banned it altogether.

Tax on Bitcoin & Legality in India?

No specific body administers or regulates Bitcoins similar to RBI which administers physical currency in India. Further, no central authority in India authorises or regulates Bitcoin as a medium of payment. As of now, RBI has not given the status of legal tender in India to cryptocurrency including Bitcoins.

Under Budget 2022, the finance minister introduced Section 115BBH with a 30% tax on virtual digital assets. The definition of virtual digital assets covers cryptocurrency and non-fungible tokens i.e. NFT. Thus, bitcoin is now taxable in India at a 30% rate. However, they are still not recognised as legal currency in India.

This article tries to analyze the taxation on bitcoins by considering them as both goods and currency. The holding period impacts the taxes on bitcoins. The tax treatment of bitcoins will depend upon their generation.

Tax on Bitcoin held as Investment

As per Sec 2(14) of the Income Tax Act, capital asset means “property of any kind held by the assessee whether or not connected with his business or profession”. The definition of ‘Capital Asset‘ provided is widest in itself and covers all kinds of property except those expressly excluded under the Act. Therefore, any gains arising out of the transfer of Bitcoins in exchange for real currency are treated as Income from Capital Gains, if they are held for investment. Bitcoins will give rise to a Long-term capital gain or a short-term capital gain depending on the period of holding of the bitcoin. Tax on Bitcoin held as Stock in Trade

The tax treatment of bitcoins when held as ‘stock in trade’ would give rise to income from business. Gain from the sale of bitcoin is taxable as business income if traded frequently.

Bitcoins received as consideration for the sale of goods and services

Bitcoins received as consideration of goods and services shall be treated on par with receipt of money. The receipt of bitcoin shall constitute income in the hands of the recipient. Further, since the recipient receives this income out of a business or profession, he would be taxed, normally, under the head “Profits or gains from business or profession“. With regards to the disclosure requirement of bitcoin in the income tax return forms, there continues to be a lack of clarity.

Bitcoin Mining

On the taxability of bitcoins earned during the ‘mining’ process, it is said that Bitcoins generated during the ‘mining’ process are classifiable as self-generated capital assets.

The sale of such bitcoins would, in the ordinary course, give rise to capital gains. However, the cost of acquisition of a bitcoin cannot be determined as it is a self-generated asset. Furthermore, it does not fall under the provisions of Section 55 of the Income-tax Act, 1961 which specifically defines the cost of acquisition of certain self-generated assets. The capital gains computation mechanism fails following the Supreme Court decision in the case of B.C.Srinivasa Shetty. Hence, no capital gains tax would arise on the mining of bitcoins.

Note: There is a possibility that the department may not consider bitcoins as capital assets at all. Hence, the provisions of capital gains would not apply at all. However, the treatment is not yet clear under Indian law which makes it difficult to conclude how it may be taxed.

FAQ

How to set-up Bitcoin Wallet?

The Bitcoin applications ensure you have a bitcoin wallet that helps in storing and selling bitcoins. The creation of wallets takes place when you sign in and create your account.

What is the minimum amount of bitcoins that you can buy?

One bitcoin today might cost you up to INR 26 lakh but you don’t need to buy a whole bitcoin in the beginning. You can start with as low as INR 500 and buy a tiny portion of a bitcoin. However, there is a maximum limit to the number of bitcoins that you can buy.

How can you buy bitcoins in India?

Buying bitcoins in India is easy. You can choose any of these platforms – Coinsecure, Zebpay, and UnoCoin – which are widely trusted in the world of cryptocurrency.

How did the value of bitcoin increase so dramatically?

Mining is directly proportional to the expense. The competition of solving this complex problem can make the process even costlier. The limited availability of bitcoin has also increased its demand. The limited supply has fueled the bitcoin hype, which has led to a sharp increase in its price.

Can we use bitcoins only in India?

Bitcoins can be used anywhere across the globe because it is digital and is termed to be ‘globally accepted’.