Why Not Evade Crypto Taxes in India?

You’ve just had a successful run in the crypto market, and it’s exciting to see your gains. But when it comes time to handle taxes, you might feel tempted to ignore them and keep your profits hidden. While it
might seem quick and easy, evading crypto taxes in India can lead to severe problems.

In this article, you will learn why paying your crypto taxes honestly is essential. Moreover, it will cover the risks of facing heavy penalties and legal issues and show why taking the right approach is the best way to
protect your gains and stay stress-free.

How Are Crypto Taxed In India?

Here’s a simple breakdown of how cryptocurrency tax in India functions:

CGT (Capital Gains Tax)

When you make gains from trading cryptocurrencies, they’re taxed at 30% plus a 4% health and education cess under Section 115BBH. This rate applies to short-term and long-term capital gains, meaning the tax rate remains unchanged regardless of how long you’ve held the crypto.

This tax applies whenever you transfer digital assets, whether a private investor or a commercial entity. Remember that the only deduction allowed is the cost of acquiring the crypto—no other expenses or deductions can be claimed.

TDS (Tax Deducted at Source)

From July 1, 2022, Section 194S requires a 1% Tax Deducted at Source (TDS) on the transfer of crypto assets. This applies if the transaction amount exceeds INR 50,000 in a financial year, though in some
cases, this threshold is reduced to INR 10,000. The exchange deducts the TDS at the time of the transaction, ensuring that a portion of the tax is paid
upfront.

Income Tax

In addition to capital gains tax, the Income Tax Department (ITD) may treat certain cryptocurrency activities as taxable income. This includes:
● Mining crypto coins
● Receiving crypto as a gift
● Salary paid in cryptocurrency
● Crypto airdrops
● Staking rewards

Later, if you decide to sell, trade, or use these tokens, any gains will be subject to the 30% capital gains tax.

Why Not To Evade Crypto Taxes In India?

The punishment for tax evasion in India depends on how severe the violation is. Here’s a quick overview:

Penalties for Under-Reporting or Misreporting Income

If you underreport or misreport your income, you face significant penalties. The fine can range from 50% to 200% of the tax amount you owe. If you owe INR 1 lakh in taxes, you could pay an additional INR
50,000 to INR 2 lakh in penalties.

In addition to the financial penalty, depending on the severity of the offence, you might also face imprisonment for up to 7 years. This harsh punishment aims to deter tax evasion and ensure compliance
with tax laws.

Charges for Filing Income Tax Returns Late

Filing your income tax return after the deadline comes with penalties. You will be charged interest at 1% per month on the outstanding tax amount. Late fees, ranging from INR 1,000 to INR 5,000, will also apply. If the delay is significant, the total financial burden can become heavy.

Like under-reporting, failing to file on time can also lead to imprisonment for up to 7 years if the offence is severe enough. This stringent approach is intended to encourage timely filing and reduce delays in tax
collection.

Consequences of Failing to Deduct or Deposit TDS

When you fail to deduct Tax Deducted at Source (TDS) or do not deposit the deducted TDS with the government, you are liable for additional charges. This includes interest on the amount that should have been deducted and late fees. The government imposes these penalties to ensure tax deductions are appropriately managed and transferred to the authorities immediately.

Can The Income Tax Department Track My Crypto Transactions?

Yes, the income tax department can track your cryptocurrency transactions. They actively collect data from Indian cryptocurrency exchanges even before implementing the Tax Deducted at Source (TDS)
under the Financial Act 2022.

TDS helps the tax department monitor crypto investments at the point of acquisition. It applies to all crypto transactions, including NFTs, stablecoins, and tokens. The TDS reporting requirements allow the income tax department to access transactional data from domestic exchanges, peer-to-peer transactions, and activities on international exchanges.

To enforce TDS compliance on international exchanges, the Financial Intelligence Unit (FIU) India sent a notice on 28 December 2023 to nine foreign crypto exchanges, banning them for failing to comply with
anti-money laundering policies.

The exchanges affected were Binance, KuCoin, Huobi, Gate.io, Bittrex, MEXC, Kraken, Bitstamp, and Bitfinex. However, Binance and KuCoin have accepted FIU's terms, mak, which has made a legal crypto
exchange in India.

The Finance Ministry of India and the income tax department are continuously working to track and list Virtual Digital Asset (VDA) transactions across the country.

What To Do If You Have Previously Ignored Your Crypto Taxes?

If you need to report cryptocurrency transactions in a previous income tax return, you can take specific steps to correct the situation, though penalties might still apply. First, you should file an updated return under Section 139(8A) using Form ITR-U and the relevant ITR form. You can only file this updated return if you have taxable gains from cryptocurrency transactions for the relevant financial year. If you have incurred a net loss, you can't file an updated return because these losses are not deductible for this purpose.

Remember, you have only 24 months from the end of the tax year to file an updated return. For example, the deadline to file ITR-U for the assessment year 2023-24 (FY 2022-23) is 31 March 2026. Filing an updated return does not exempt you from penalties for unpaid income tax. Still, the penalties are generally less severe than those imposed by the Income Tax Department if they find discrepancies later.

If you file your ITR-U within 12 months from the end of the tax year, you will face a penalty of 25% of the outstanding tax amount plus any interest charges. If you file your ITR after 12 months but before 24 months, the penalty increases to 50% of the outstanding tax amount, along with interest charges.

Conclusion

Handling your crypto taxes might not be the most thrilling part of trading, but it’s essential for staying within the law. Evading taxes might seem like a simple way to keep more of your gains, but it can lead to serious trouble, including hefty fines and legal issues. By facing your tax obligations honestly, you avoid these risks and build a solid foundation for your financial future.