How to handle the tax notice for Bitcoin transactions?

Any communication received from the Tax Department is always worrisome for any taxpayer and especially when it is not a normal notice but a summon under section 131 of Income Tax Act. Very recently many taxpayers across India who had invested in Bitcoins or other cryptocurrencies have received this summons to furnish the response in terms of documents and evidence for the questionnaire attached to the summoning.

So before you get worried or press the panic button first understand what the department wants you to do?

Why has the department issued notices for bitcoin transactions?

If you have noticed, the government has made it clear that use of cryptocurrencies is illegal for any financial transactions like wherever we do transactions by paying cash or bank transfer or card swiping, bitcoins are not legal to replace any of our existing legal financial mode of buying or selling things. Apart from that, many people have purchased these coins and have made good gains due to the sudden surge in their prices and may not have paid taxes or declared in their returns.

What are you supposed to do?

Wherever there is an income there is going to be a tax, so if you have made any profit from your bitcoin trading, you have to pay tax on it (please refer my earlier column on how to pay tax on bitcoins profit). At this moment Central Board of Direct Taxes (CBDT) has not included in the act and hence paying taxes on the said profit is subject to the law of our land. Pay the maximum marginal rate of tax and stay worried free. Declare this income while filing your taxes and make sure that before March 15, 2018, pay the advance tax as due on the gains.

Some of the questions which are being asked are as follows:

1. Details of sources of income

2. Details of income tax return filed for last six years.

3. Details of movable and immovable property held by you and other family members

4. Details of your bank accounts

5. What are the cryptocurrencies you are dealing with and since when?

6. What was your source of income for the initial investment?

8. In which Bitcoin/ cryptocurrency exchanges you have accounts in India as well as abroad?

9. Furnish the details of all the wallets you are using along with their unique ID/number

10.Are you using physical hardware wallet for storing your cryptocurrencies? Give the balance as on the date along with the public ID/wallet number on the blockchain account.

There are around 28 total questions you need to furnish responses for (including the above 10 questions)

How to respond to this summon notice?

The CBDT since past few years has been making it easier for the taxpayers to comply with any sort of such notice. But this particular notice as received by many contains 28 points one need to answer along with the documentary evidence and sufficient proofs. First five questions are towards asking details of your tax returns for the last six years and assets and bank statements. Remaining all the other points are towards your dealing in cryptocurrencies.

Immediate things to do:

1 Do not panic and do not ignore this notice: Do not get panicked and make a mistake of ignoring this notice either of it is wrong, you need to handle it diligently.

2. Collect all the documents and information: Immediately collect all the relevant documentary evidence for your specific bitcoins and other cryptocurrencies transactions which the summon has identified. Do not worry, the department just wants to make sure that you have paid the due taxes if any of your gains or have already started accounting this in tax working. As long as you can justify all income source, transactions, you need not worry.

3. Reply to the notice in time: You should always reply to any income tax notice within the stipulated time frame, in any case, or for any genuine reason, if you are not able to manage to collect all the proofs and required documents, you may still ask and request for some more time to gather the relevant documents. Your timely response will establish the fact that you are honest and a law-abiding taxpayer with your genuine intent to cooperate with the law.

4. Seek Professional Help: It would be wise to seek a professional help in case you do not understand the said notice or how to handle the same to avoid any issues at a later stage. But before that, you should follow the aforesaid mentioned process at.

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• Do not panic and make a mistake of ignoring the notice either of it is wrong, one needs to handle it diligently.
   
• As long as one can justify all income source, transactions to the tax department, they need not worry.

The writer is a chartered accountant and chief gardener of Money Plant Consultancy