The Income Tax Department of India is secretly grooming its officials to investigate cryptocurrencies. An internal guidebook circulated by the department explains cryptocurrencies, their characteristics, the "dark side of Bitcoin" and the best investigation practices for revenue enhancement officials.

The Indian regime doesn't consider cryptocurrencies as legal tender, but it also hasn't declared them outright illegal. Crypto investors are therefore still doubtful on how to show their investments in their annual income tax returns. Due to all these circumstances, earning through cryptocurrencies is a gray area for the Indian crypto community.

Before this twelvemonth, the Income Tax Department sent detailed notices to some cryptocurrency investors. The section asked for details on the last three years of their income taxation returns, credit and debit carte transactions, as well equally their investment in Bitcoin or other cryptocurrencies. The department asked a full of 26 questions, and 21 of these were related to crypto investment, transacting on cryptocurrency exchanges, using paid services via cryptocurrencies, using crypto wallets, and other topics related to crypto. These were some of the questions:

  • Delight state whether y'all are buying/selling Bitcoins or other cryptocurrencies from LocalBitcoins.com via cash or via peer-to-peer transactions.
  • Are you involved in mining by investing in your own physical setup or via cloud mining?
  • Have yous received any Bitcoin/cryptocurrencies for whatsoever sale fabricated/service rendered? Have you declared whatsoever such income in previous income tax returns?

Previously, in 2022 and 2022, the tax department sent notices to thousands of crypto investors and traders. The department also previously surveyed major crypto exchanges to collect the details of individual crypto traders.

Internal training of taxation officials

And so, how does the department design these detailed, in-depth questions? The respond lies in a guidebook titled "Introduction to Crypto-currencies and Forensic Examination of Bitcoin," created by Republic of india'due south Fundamental Board of Directly Taxes. The nation's income taxation section has been training its officials since 2022 to investigate cryptocurrency investment.

Introduction to Crypto-currencies and Forensic Examination of Bitcoin

The first 4 chapters of this volume bargain with the origin of cryptocurrencies, public key cryptography, Bitcoin basics, mining, 51% attacks, cake rewards, and transaction fees. It states that virtual currency is a digital representation of value, merely does non have condition as legal tender in any jurisdiction. It continues by saying that it is neither issued nor guaranteed by whatever jurisdiction, and it fulfills different functions only by agreement within the customs of users.

The book explains different terminology in-depth and concludes that the terms "virtual currency," "digital currency" and "cryptocurrency" have singled-out meanings.

The book states that the Indian Bitcoin market has seen steady growth over the last few years. There are some well-designed websites that offer multiple investment options. Others operate on the dark web, by and large through social media accounts. According to the book, there are 297 locations spread over the country where people actively appoint in Bitcoin-related trade. All these people tin be tracked, the guidebook claims. A full of 9,408 cities are agile locations for crypto-to-greenbacks transactions.

Introduction to Crypto-currencies and Forensic Examination of Bitcoin

Are you lot doing crypto-to-cash transactions with tax officials?

The tax section also created some simulated accounts to investigate crypto traders in India, a source said. The book also supports this and puts down some real examples of how someone can investigate traders on the platform LocalBitcoins. As this platform does not require much proof of identity, information technology is home to a lot of illegal trading.

According to the volume: "Allow'south see a case of Bittu Sharma. He is on a local Bitcoin forum and willing to purchase Bitcoin in cash most Delhi. He put his bank details and contact number there, and by investigating, an authority reveals his real proper name as Prashanna."

Taxation officials are using tools like Blockexplorer.com and Blockchain.info, which provide insights and search capabilities for tracking transactions in a shared public ledger or blockchain. This can lead to a user's IP address and yield valuable information about the user's location. The guidebook includes some screenshots to show a step-by-step search of Bitcoin address on these blockchain websites.

The guidebook also analyzes the effect of Republic of india's Nov 2022 demonetization, in which the government stripped 500 and 1,000 rupee banknotes of their status as legal tender.(It replaced them with new 500 and 2,000 rupee notes.) During this time, people may have converted their black coin into Bitcoin and hidden it in the semi-bearding earth of cryptocurrencies.

Searching for clues

Third parties or intermediaries like Bitcoin exchanges, traders and processors are important sources of evidence for establishing trader identity, transactions undertaken, the identity of counterparties, the related banking concern accounts used and and so on. Revenue enhancement officials track such platforms (and their customer lists) to discover people trading Bitcoin or other cryptocurrencies.

The Income Tax Section as well investigates other social media platforms similar blogs, forums, Bitcoin Talk, Bitcoin Forum, messenger apps and the like to find more clues. According to the book, in that location are some established characteristics of a potential cryptocurrency user:

  • Tech-savvy individuals, a person uses gadgets similar smartphones, tablets, laptops, etc.
  • The age group of xviii-40 years old is most likely to adopt cryptocurrencies.
  • Professional person gamers, those spending enough time online or in virtual reality.
  • High internet worth individuals.

Introduction to Crypto-currencies and Forensic Examination of Bitcoin

The volume explains different measures undertaken by tax officials during enforcement deportment. Information technology includes individual investors, service providers, exchanges and miners.

Seizing cryptocurrencies

Here comes the nigh interesting part. The book states that if officials discover irregular activity with any offline or online wallet linked to an investor, they should outcome a prohibitory gild u/due south 132 (3). If the investigation proves that the source is unexplained or represents unaccounted income, an intermediary can be directed to convert crypto into Indian rupees, which tin can exist seized.

If this is an on-concatenation or online wallet:

  • If a private cardinal is found, the person can be asked to convert crypto into rupees, which tin be seized.
  • If a private primal is not found and the person is not cooperative, an authorized officer should identify a prohibitory lodge on the person. Alternatively, suppose y'all own 10 BTC and aren't cooperative — the department can convert that 10 BTC into rupees and tin can seize other assets equivalent to that value.

It too suggested that the Income Taxation Department should have its own official wallets to transfer the person'due south seized crypto holdings.

The department'southward been preparing for a long time

On Apr six, 2022, the Reserve Bank of Republic of india circulated a notice and asked banks not to provide any services to individuals and companies associated with digital currencies. But the revenue enhancement section was planning to strengthen its workforce long before. The press and publication wing of the Directorate of Income Tax released an open tender discover on Dec. 13, 2022, with the subject area line "Inviting sealed quotations for publishing of book titled 'Introduction to cryptocurrencies and forensic examination of Bitcoin transactions.'"

Directorate of Income Tax

As the aim of the volume was to train Indian taxation officials on cryptocurrencies and related investigations, the tax section decided that the book should non become public. When asked nearly the beingness of such a book via the Right to Information Act 2022, the department confirmed that this book was circulated, just declined to provide a re-create.

Anoush Bhasin, founder of tax advisory business firm Quagmire Consulting, said that given the significant value that Bitcoin has generated in the last decade, it was spring to garner interest from tax authorities around the world. He said, "As far as India is concerned, the existing direct tax laws are squarely applicative to crypto asset transactions. The nature of income and exact disclosure depends on the blazon of transaction. In line with this, we accept been encouraging and assisting Indians dealing with crypto avails to comply with income tax laws."

The author works as a journalist for a major Indian business newspaper and managed to become this guidebook through his sources.