In recent weeks, the Indian tax authorities have intensified their focus on the cryptocurrency space, sending out notifications to numerous taxpayers regarding unreported income from virtual assets. This strategic move aims to enhance transparency in the burgeoning cryptocurrency market.
The initiative is part of a comprehensive effort to detect concealed profits and mitigate potential cases of money laundering associated with digital currencies.
Increased Vigilance on Digital Assets
Officials from the Central Board of Direct Taxes (CBDT) are scrutinizing whether taxpayers have accurately reported their crypto transactions in Schedule VDA of their income tax returns. Reports indicate that many individuals in high-risk categories have either provided insufficient information or failed to report entirely.
Virtual asset service providers (VASPs) submit Tax Deducted at Source (TDS) reports, but discrepancies often arise compared to income declared on tax returns. This inconsistency has resulted in a surge of compliance notifications.
Understanding the 30% Tax Framework
Per Section 115BBH of the Income Tax Act, gains from transferring virtual digital assets (VDAs) are taxed at a flat rate of 30%. Taxpayers are only permitted to deduct the purchase cost of the asset, with no other tax offsets allowed.
Importantly, individuals cannot offset losses or carry them forward to future tax years. Various taxpayers who attempted to take advantage of cost indexation or report losses under different categories have found themselves facing substantial penalties and interest charges.
Compliance Campaign: The NUDGE Initiative
This marks the third iteration of the “NUDGE” initiative—an acronym for Non-intrusive Usage of Data to Guide and Enable—launched in the past six months. The previous campaigns targeted unreported foreign assets and fraudulent claims related to political donations under Section 80GGC.
The primary objective behind this strategy is to leverage data analytics rather than invasive measures to encourage taxpayers to amend their returns voluntarily. This approach integrates banking data, TDS filings from VASPs, and blockchain utilization to create a more effective compliance framework.
Implications for Traders and Cryptocurrency Exchanges
For those engaging in small-scale crypto trading, the landscape has become considerably more challenging. Traders who have realized profits in the fiscal year of 2022-23 must ensure proper reporting, as omissions in Schedule VDA could lead to alarming notices and increased tax liabilities.
Cryptocurrency exchanges also find themselves under heightened scrutiny regarding their reporting obligations. Any inaccuracies in their TDS submissions could lead to deeper investigations into their user transactions.
The focus now shifts to the reactions from traders and service providers. Some may enhance their record-keeping practices, while others could reduce trading volumes to mitigate tax consequences. Conversely, institutional players may feel reassured by the clear rules and consistent enforcement, potentially attracting more serious investors into the crypto ecosystem.
Image courtesy of Unsplash, chart from TradingView
