cryptocurrency tax: Crypto investors seek clarity on reporting assets in I-T returns

Wealthy Indian investors who have moved their crypto holdings to wallets with exchanges and vaults abroad to escape a hostile regime at home are in a Catch22 situation – unsure whether to disclose these ‘virtual digital assets’ in their Income Tax returns (ITR).

Having shifted the coins offshore using the Blockchain network to avoid stifling regulations, they have sensed that sharing the information with Income tax (I-T) authorities could invite as much trouble as hiding it.

Declaring their crypto holdings – originally bought on Indian exchanges and now parked in wallets with overseas bourses – in the ‘Foreign Assets (FA) schedule would be an indirect admission of having undertaken a transaction that could 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 the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act – a harsh law that came into force in 2015 and can be used to impose criminal sanctions. (Under 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).

Techie Vs Taxman

Interestingly, however, given the nature of cryptos, which are different from regular assets like bank accounts, properties and securities, the dilemma of taxpayers could also put the tax office as well as practitioners in an unchartered territory.

“Reporting of crypto assets is fraught with issues – there are multiple aspects like identification of location, situs that are relevant. Two major theories on situs are: first, it is situated where the owner of crypto assets are situated in which case for resident taxpayers, cryptos may not be treated as foreign assets – and hence no reporting in Schedule FA is required; second, where the wallet that holds the crypto assets is situated (this could be offshore and hence may require reporting). Some nations have come out with guidance in this regard. While tax rates have been prescribed under Indian Income Tax laws, clarity on this aspect is still awaited,” said Ashish Mehta, partner at the law firm Khaitan & Co.

But this is a tricky terrain that could put techies and the taxman at loggerheads. To the former, wallet locations cannot be geographically defined: wallets are accessible through the Blockchain (the shared database or ledger that’s the backbone of the crypto world), which in turn can be accessed over the Internet. And, since the Blockchain is a network of computers which may be situated in various countries, how then does one pinpoint the location of a wallet. To a techie, a crypto wallet is like an email account, which can be accessed irrespective of where the user is located.

But tax and FEMA experts believe that such crypto transfers could come back to bite investors. “The movement of crypto from Indian Wallet to overseas wallet per se is prohibited as it requires prior approval. One need to evaluate on whose advice the crypto was moved offshore,” said Rajesh Shah, partner at the CA firm partner of Jayantilal Thakkar & Company. According to Moin Ladha, partner at Khaitan & Co, “Transfer of an asset overseas would be treated as a capital account transaction. Since capital account transactions are permitted only with a general or special permission and there is information sharing between regulators, one should ensure due compliance to avoid any subsequent issues.”

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 garb of cryptocurrency.

According to market circles, most large investors who transferred their coins ‘abroad’ have probably done it with the intention of not disclosing them – a strategy that may backfire with the Enforcement Directorate going through data obtained from exchanges, and any large crypto movements are likely to catch their attention. But if they do disclose, it’s only a matter of time the I-T department shares the data with the ED – which it typically does.

Besides the FA schedule, taxpayers with income above ₹50 lakh a year have to also declare their domestic investments separately in the ITR. “Some HNIs, even after transferring their cryptos overseas, have declared these assets as domestic investments in the ITR. The I-T department doesn’t care where and how the cryptos are held, and the ED may never find out – at least, that’s what they are hoping,” said another person.