How to handle income tax notices for cypto income?

Income Tax Income Tax Notices
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The gross receipts shown for income as Virtual Digital Assets in Form 26AS, on which credit for TDS u/s 194S has been deducted, are higher than the total of the receipts shown under Income from Virtual Digital Assets in the return of income. Hence, the return of income filed is regarded as defective…

This is the communication several taxpayers are receiving from the income tax department. It means a notice has been issued where the taxpayer’s ITR is flagged as defective, and if they fail to respond within the specified time, the return will be marked as "invalid.”

One of the primary reasons for these notices is the non-reporting of crypto income. Even in cases where crypto income is reported, mismatches between the taxpayer’s declaration and the ITD’s records can trigger such notices.

See, TDS is applicable on crypto transactions, and when it is deducted, the TDS details along with the credited amount are reflected in your Form 26AS. This way the ITD has a record of these transactions. Hence, if you miss or inaccurately report the cypto income, you may receive a notice.

What should you do if you receive this notice?

If you have received the defective return notice, you have 15 days to respond to it. There could be two cases, you can either agree or disagree with the notice.

  • If you agree with the notice, you are required to file a revised ITR, ensuring the crypto income is reported accurately under the correct schedule.
  • If you disagree, you must provide valid evidence to support your claim and explain why the notice may not be applicable.

Here are the steps that you need to follow:

  1. Login to the ITD’s e-filing portal.
  2. Go to pending actions > e-proceedings.
    How to respond to income tax notice?
    How to respond to income tax notice?1035×544 35 KB
  3. You’ll be able to see the notice here. Once you go to respond, you’ll see the options to either agree or disagree with the notice. Select the option applicable to your case.

If you agree to the notice, you’ll have to file a revised return and report your crypto income under Schedule VDA.

Here’s a detailed guide for reporting crypto income: How to report crypto income in the ITR?

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The bad thing about cryptos are that you can’t pay as a gift.