Decoding crypto tax notices: Expert explains different notice types, penalties, how taxpayers should respond
AI Summary
Crypto investors are facing an increase in tax notices from the Income Tax Department due to automated checks highlighting compliance gaps, particularly for the FY 2021-22. Investors are advised to reconcile their reported income with actual gains to avoid potential tax demands and should be aware of the specific sections under which notices are issued to respond appropriately.
With the Income Tax Department relying more on automated and data-driven checks, crypto investors are increasingly receiving tax notices, often for compliance gaps they did not know existed.
Here are different types of crypto tax notices, the consequences of non-compliance and the right way to respond.
Punit Agarwal, Founder and CEO of KoinX, shares that “crypto notices don't follow a single fixed sequence.”
A Section 143(1) intimation is issued automatically after an ITR is processed and usually flags a TDS or Schedule VDA mismatch against Form 26AS or AIS.
A Section 139(9) defective return notice, a Section 142(1) inquiry or a Section 133(6) request for wallet and exchange records can each be triggered independently, by different checks run at different points.
Agarwal explained that “One notice does not automatically lead to another. However, if investors fail to respond, it can result in reassessment under Sections 148A and 148, scrutiny or best judgment assessment under Sections 143(3) or 144, and eventually a tax demand under Section 156.”
According to Agarwal, the current wave of crypto tax notices is largely centred on FY 2021-22, the financial year immediately before crypto-specific tax rules took effect in FY 2022-23.
“The most active wave right now involves Section 148A show-cause notices tied specifically to FY 2021-22,” he said.
These notices are generated by the Income Tax Department's Insight Portal and Compliance Risk Information Unit (CRIU), which cross-checks PAN-linked KYC details, exchange data and bank transactions against the income reported in tax returns.
“A recurring issue is that these notices sometimes reflect an investor's gross transaction value rather than their actual taxable gain, which inflates the apparent income significantly,” Agarwal said.
He said that reconciling turnover against actual gains, transaction by transaction, can help investors avoid tax demands.
Agarwal highlights the two key provisions that catch crypto investors more often than most expect.
Agarwal said, “Cash settlements and delayed TDS deposits are both avoidable, but investors often don't realise they carry this kind of exposure until a notice arrives.”
Agarwal emphasised that investors should first identify the section under which the notice has been issued, as it determines the response timeline and the documents required.
“Investors should gather their AIS, Form 26AS, and complete transaction records from every exchange and wallet used, and reconcile them with the details reported in their tax return,” he said.
Original Article
Published on Livemint