Income Tax Department Flags Crypto Risks

SUMMARY

The department told a Parliamentary panel that VDAs could be used to move funds through a system without regulated financial intermediaries

The department also noted that offshore exchanges, private wallets and decentralised platforms made it “very difficult” for the authorities to detect taxable income

With this, the I-T department has effectively toed the line of RBI, which previously termed VDAs as a threat to the country’s financial stability

Following Reserve Bank of India’s (RBI) suit, the income tax (I-T) department has now also reportedly raised concerns over risks associated with virtual digital assets (VDAs) like cryptocurrencies.

A source told Times of India that the I-T department, in a presentation before the Parliamentary standing committee on finance, flagged concerns that VDAs could be used to move funds through a system without regulated financial intermediaries.

Tax officials reportedly cited the anonymous, border-less and near-instant nature of cryptos as the cause for such concern.

As per the report, the department also informed the committee that offshore exchanges, private wallets and decentralised platforms made it “very difficult” for the authorities to detect taxable income. It added that the anonymous nature of VDAs made holdings and owners of these assets difficult to decipher.

Elaborating on this, tax officials also reportedly noted that jurisdictional limitations, offshore VDA activity and very little ability to check cash flows made verification and recovery of tax dues related to cryptos virtually impossible.

The department further reportedly informed that difficulties related to sharing of information between multiple jurisdictions hindered tax officials from undertaking proper assessment and reconstruction of transaction chains.

This follows the I-T department last year sending 44,000 emails and messages to individuals for not filing cryptocurrency transactions in their FY25 returns.

With this, the I-T department has effectively toed the line of RBI, which previously termed VDAs as a threat to the country’s financial stability. In June last year, the central bank’s Governor Sanjay Malhotra said that cryptocurrencies could hamper India’s financial stability and the monetary policies.

India is among a handful of nations globally, which have so far been reluctant to allow cryptocurrencies and stablecoins despite heavy lobbying. Additionally, the Centre has opted for a heavy taxation regime to curb crypto volumes.

The government began levying a 1% tax deducted at source (TDS) on crypto transactions above INR 10,000 and a hefty 30% capital gains tax in 2022. The government collected INR 705 Cr in taxes from VDA income between FY23 and FY24.

Alongside, tax authorities have mandated registration of entities dealing in crypto and other VDAs. Many crypto exchanges have been banned and issued show-cause notices in the past few years for not complying with local norms and for not registering with the Financial Intelligence Unit (FIU).