The Income Tax Act gives the department the authority to assess, reassess, or recompute the total income of any person if it has reason to suspect that there has been an instance of income escapement. The department issues a notification under section 148A of the ITA to do this. Read on to learn about it.
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Income Tax Notice for Crypto – overview
Several cryptocurrency traders received notices from the Income Tax Department by Section 148A(b) of the ITA. The ITD sent income tax letters to taxpayers who engaged in crypto trading but failed to record it on their ITR or pay the associated tax.
The assessee was requested by the department to provide supporting paperwork and books of accounts to support the transactions described in the tax notice. The goal is to keep tabs on the funding sources used for cryptocurrency transactions. Considering that this is a show-cause notice, the taxpayer must provide evidence as to why the AO should not send them a notice under Section 148 for income escaping assessment.
Let’s examine the tax notice for crypto trading, how to reply, and the consequences if you failed to declare your crypto revenue on your ITR. To learn more, get in touch with Vakilsearch, who can assist you in any circumstance, whether it be a legal or financial one.
What does the Income Tax Act’s Section 148 mean?
In accordance with subsection (b) of Section 148A of the Income Tax Act, the ITD has issued notices. Before a notice under Section 148 is issued, an inquiry must be made and an opportunity must be given. This is done under Section 148A.
By delivering a show cause notice, clause (b) of Section 148A aims to give the taxpayer a chance to be heard. The taxpayer must give the tax authority justification for not issuing a notice in accordance with Section 148.
In cases where the income has eluded assessment, the tax office issues a notice in accordance with Section 148 of the Income Tax Act. The taxpayer must respond to this time-bound notice within the allotted window of time. The Assessing Officer, or AO, may issue a notice under Section 148 if
- The AO has received previous authorization from the designated authority to issue such a notice after receiving information that the taxpayer’s taxable income has eluded assessment.
Notice of Tax Under Section 148A for Crypto Trading (b)
Several traders received tax notices under Section 148A(b) for crypto trading for the fiscal years 2015–16, 2016–17, and 2017–18. The following details were included in the tax notice:
- Transaction value in cryptocurrency trading
- Pertinent fiscal year
- Cryptocurrency transaction revenue was not disclosed as LTCG or STCG.
The following instructions were given to the bitcoin traders:
- Bring books of accounts and other pertinent documents to the ITD office.
- Should provide the bank statements for all of their accounts, as well as those of their family members.
- Calculate the gain or loss from investments made during the relevant financial year and submit it.
- Share information about your sources of income, international and domestic investments, and bitcoin and another crypto trading.
- Declare information about your crypto wallets—both in India and abroad—as well as the sources of your deposits.
- Respond to the notice by sending it in by the deadline.
How Do the Income Tax Authorities Know About Cryptocurrency Trading?
When opening accounts for bitcoin trading, the exchanges for crypto ask the traders for their PAN. The largest crypto exchanges in India’s ITD provided information on bitcoin users,
which was then compiled and analyzed. They thereafter sent tax warnings to cryptocurrency traders who had large cryptocurrency transactions. Additionally, the VRU/CRIU functionality on the IT Insight Portal provided data on crypto transactions to the ITD. On December 10, 2021,
The CBDT sent out a circular instructing income tax commissioners to upload data to the Insight site. To issue a notice under Section 148 of the Income Tax Returns,
The Circular contained instructions on how to provide data on VRU/CRIU functionality. Verification Report Upload, or VRU, is a feature on the Income Tax Insight Portal where data on income escaping assessment is uploaded.
Tax Penalty for trading cryptocurrencies under Section 148
Many traders failed to disclose their crypto trading profits and failed to pay taxes on it. Under Section 148 of the Income Tax Act, the AO is authorized to issue a notice opening the matter for assessment or reassessment. In the following circumstances, the AO may also apply a penalty equal to 50% of the tax due:
- If the income determined by AO is higher than the income the crypto trader disclosed on their ITR.
- If the crypto trader hasn’t submitted an ITR but the revenue determined by AO exceeds the fundamental exemption limit.
The AO has the power to impose penalties for the taxpayer’s end of the compliance failure in addition to the tax liability. The crypto trader has a set amount of time to react to the income tax notice. In accordance with the guidelines provided in the tax notice, you can submit a response. Respond via email or using the e-proceedings feature on your account on the income tax website.
The implementation of Section 115BBH for the taxation of virtual digital assets would begin on April 1, 2022, or from FY 2022–2023 onward. The taxpayer should take into account the following when responding to the tax notice because there was no specific tax provision for tax on revenue from crypto trading for the earlier years:
Justify the type of transactions and income source in your submission as a response to a notice under Section 148A. Moreover, give the tax officer access to the pertinent records and books of accounts.
- According to the trader’s aim and the frequency of transactions, you should treat the income as capital gains tax or business income. Report the money as business income if there were major trade transactions or if the goal is to make profits. Report the income as capital gains, however, if there were few transactions or if the goal was to invest for long-term growth.
- If you had included the income from cryptocurrency trading in your ITR and paid tax on it, you might file a response outlining the transactions’ nature and how the ITR handled them.
- In response to the notice under Section 148, you must now submit an ITR, disclose all of your income, and pay tax on it if you hadn’t already done so.
Conclusion
Taxpayers who have not paid the appropriate amount of tax on their crypto trading income may receive notices under Section 148 of the ITA. Taxpayers must appropriately declare and pay taxes on their crypto trading revenue to avoid receiving a notification and having to pay fines and interest.
In order to comprehend and respond to a Section 148 notice that you have received, it is advised that you seek the advice of a certified tax professional, such as Vakilsearch
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