The income-tax department may make a permanent account number (PAN) mandatory for cryptocurrency investors, in line with the demat account rules for stock market transactions, according to two people privy to the discussion.
At present, disclosure of crypto holdings and related gains is voluntary.
If tax authorities go ahead with the PAN mandate, crypto exchanges will have to furnish a statement of financial transactions (SFT) before the income-tax department.
“The department wants the income from cryptocurrency trading to reflect in taxpayers’ annual information statement (AIS) for tax-filing purposes,” said a government official.
Therefore, the tax department may ask crypto exchanges to report all transactions done by their users, the official said.
The official was of the view that making PAN mandatory would help cryptocurrency investors meet the Know Your Customers (KYC) requirements and hence allow better monitoring of such transactions and detection of any attempt of tax evasion or laundering of funds.
ITR filing for the assessment year 2022-23 did not reflect crypto transaction details.
According to the sources, such information would be reflected while filing ITR from the next assessment year.
“The SFT returns concept came in to keep a watch on high-value transactions undertaken by taxpayers.
"Currently, only specified classes of persons are required to file SFT, and crypto exchanges do not fall there.
"In case these exchanges have to file SFT returns, investors’ PAN information would be mandatory.
"This shall widen the tax base and also boost transparency in the cryptocurrency ecosystem.
"But this will increase the compliance burden on them,” said Amit Maheshwari, managing partner and international tax lead, AKM Global.
Currently, tax sleuths are dependent on the new law on tax deducted at source (TDS) on virtual digital assets (VDAs).
It mandates a deduction of 1 per cent of the amount paid to the seller (Indian resident) to map crypto transactions.
Under the new regime effective from July 1, transactions will have to be disclosed in the income-tax return and a paper trail will have to be maintained.
If the PAN of the deductee (seller) is not available, then the tax at the time of transfer of virtual assets will be deducted at the rate of 20 per cent.
Further, if an individual has not filed his/her income tax return, TDS will be deducted at a higher rate of 5 per cent (as against the normal rate of 1 per cent), if the payer is not a specified person.
“Mapping crypto transactions around PAN and reflecting those in AIS would be a better way to enhance tax compliance, following the imposition of 1 per cent TDS on crypto transactions, in view of changing regulations around the asset class,” said Sujit Bangar, former IRS and founder TaxBuddy.com.
The Finance Bill has defined VDAs as digital assets generated through cryptographic means.
It also imposed a 30 per cent tax on the income from the transfer of such virtual assets effective from April 1, besides TDS of 1 per cent from July 1.