Taxman's lens now on telltale crypto clues

Time of India

2 days ago

Look out for random alphabets scribbled on a piece of paper or long strings of what may seem like gibberish, sprinkled with alpha numerals. Watch out for 'wallet.dat' or 'key.dat' files and pen drives tucked in closets. Gently remind a person of interest of possible imprisonment for holding back passwords they have memorised instead of jotting them down somewhere -- a trick that techies call '
brain wallets
'.
As cryptocurrencies are increasingly used to store and hide wealth, tips like these are being passed on by the
Income tax
(I-T) department to its investigators to trace and freeze this complex, little-understood digital asset. Tax officials, many of whom are probably innocent of cryptos, are being groomed to spot the clues they may stumble upon during a search and seizure operation. They are told not to mistake certain files and notings that may hold the keys to cypoto wallets, as irrelevant information or meaningless griffonage.
Besides checking for icons of mobile wallets on cell phone home screens and users' desktops, or scanning the suspect's browser history for online wallets, officers carrying out a raid have to search for indicators in the digital devices --- online account with a crypto exchange, emails and SMS, Google authenticator, specified files like wallet.dat, or passphrase on sticky notes in money wallets (which could be notes or reminders of transactions). 'A passphrase or seed password which acts as a master key to a wallet is generally longer than regular passwords for other activities and may include spaces between words,' said a person familiar with the instructions.
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Authorised tax officials have to simultaneously rummage through the search premise 'to locate hardware wallet that looks like pen-drive, paper wallet, or written seed phrase on a piece of paper or engraved surfaces,' said the person. A paper wallet, which some perceive as a more secured mode, is a printed piece of paper containing the QR Code and keys to carry out transactions.
'Due to their pseudo-anonymous nature and the ease with which they can be transferred globally, cryptocurrencies are increasingly exploited by persons seeking to evade taxes. A guidance from the department would help to standardize the investigation procedures --- identification and handling of wallets, securing and seizing of crypto assets from their wallets as well as document and evidence handling. Such guidance may draw upon the Standard Operating Procedure issued in August 2021 by the Bureau of Police Research and Development (BPRD) concerning investigation methods for cryptocurrency-related cybercrimes,' said Harshal Bhuta, partner at the CA firm P. R. Bhuta & Co.
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THROW THE BOOK
What would an I-T official do when an assessee refuses to share the password and the keys? Just throw the book at him. Under Section 132(1)(iib), a person holding accounts and records in electronic form must give the tax officer the access to information --- failing which he could be put behind bars for up to two years under section 275B. 'The department has directed that an authorised officer must inform the searched person of such provisions in the law,' said a source.
According to Ashish Karundia, founder of the CA firm Ashish Karundia & Co, 'Given that digital asset technologies are still developing, the department may seek expert assistance in specific cases. Some crypto assets, such as those stored in hardware wallets, due to their very nature, are not reported by intermediaries, making it challenging to verify their legitimacy. If the source of these assets is not disclosed, they may be considered unaccounted income or unexplained investments. Failure to report them in tax returns could, under certain circumstances, be treated as a violation of the Black Money Act.'
Scoffed at by the Reserve Bank of India, cryptos, though not banned in India, are taxed heavily: a 1% tax deducted at source for every sale, 30% tax on the profits, and the inadmissibility of adjusting losses against profit to lower tax outgo. Besides, legality of trading cryptos on overseas exchanges remains a grey area with neither the government clarifying the issue nor legal experts being unanimous on whether such transactions violate the Foreign Exchange Management Act (FEMA).