Cryptocurrency Tax: Crypto Investors Seek Clarification About Declaring 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 income 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 Foreign Exchange Management Act (FEMA). However, failure to disclose a “foreign asset” could put them on the wrong side of the Black Money Act (unredeemed foreign income and assets) and the imposition of tax – a tough law that came into effect. in force in 2015 and can be used to impose criminal sanctions. (Under Schedule FA, a person must provide details of foreign assets or income from any source outside India in a specific section of the ITR).

Technician against the taxman

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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.

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“Reporting of crypto assets is fraught with pitfalls – there are several aspects like location identification, situs that are relevant. Two major theories on the situs are: first, it is located where the owner of the crypto assets is located, in which case for resident taxpayers, the cryptos may not be treated as foreign assets – and therefore no reporting in the ‘annex FA is not required; second, where the wallet that holds the crypto assets is located (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,” said Ashish Mehta, 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, the locations of the wallets cannot be defined geographically: the wallets are accessible via the Blockchain (the shared database or ledger that is the backbone of the crypto world), which in turn is accessible by Internet. And, since the Blockchain is a network of computers that can be located in different countries, then comment on pinpointing 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 believed that 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 has to assess on whose advice the crypto has been moved overseas,” said Rajesh Shah, Partner at CA Partner 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 general or special authorization and there is information sharing between regulators, compliance must be ensured to avoid any problems later. »

When cryptos purchased with the local currency are moved to an open wallet with an “overseas” exchange, it boils down to a cross-border movement of funds under the guise 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 gathered 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 ITR. IT doesn’t care where and how the cryptos are held, and ED may never find out – or so they hope,” another person said.

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Cryptocurrency Tax: Crypto Investors Seek Clarification About Declaring Assets In IT Filings


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