India Accuses WazirX of Tax Evasion, Future of Local Crypto Sector Remains Unclear

India’s largest cryptocurrency trading platform, WazirX, has been accused by the country’s authorities of tax evasion worth $5.4 million (40.5 crore rupees). - 2022-01-05T164155.035.jpg

On December 31, the Mumbai office of the goods and services tax (GST) authority said that it tracked down Rs 49.20 crore from WazirX in taxes and penalties after a series of investigations on the platform’s transactions.

The firm, which Binance acquired in 2019, refuted the government’s claims saying any alleged evasion was unintentional. 

Zanmai Labs, which owns the WazirX platform, also said reiterated, saying the alleged tax evasion was not intentional. It is India’s first crypto-related tax evasion probe.

“There was an ambiguity in the interpretation of one of the components, which led to a different calculation of GST paid. However, we voluntarily paid additional GST to be cooperative and compliant,” it said in a statement. “There was and is no intention to evade tax.”

In WazirX, users can transact in rupees or WRX – utility tokens that Binance introduced for trading cryptocurrencies.

Since crypto has become a potential source of revenue and fraud, the Indian tax authorities are witnessing a new era of investigations.

The accusation towards WazirX comes at a time when India’s regulation towards cryptocurrencies still remains unclear.

Although India’s crypto sector seems to be booming, the government remains at a standstill as crypto firms have waited for legislation on the virtual token industry for more than a year.

The cryptocurrency bill had been listed for the parliament’s winter session, but it was not tabled due to a requirement for further deliberation.

According to a December 30, 2021, Blockchain.News reported, Ajay Tyagi, the chairman of the Securities and Exchange Board of India (SEBI), encouraged mutual funds to resist investing in crypto-related assets as they wait for the government to consider new cryptocurrency rules.

The key issues that surround India’s crypto sector are whether these digital currencies should be considered a commodity, an asset, or legal tender.

Following the classification of cryptos, the country’s taxation system is expected to see changes as it veers to protecting investors from fraud and other malpractice.

“Indian tax laws are unclear about the implications of new-age digital transactions such as crypto, NFT, online gaming, etc.,” says Jay Jhaveri, partner at Mumbai-based accounting firm Bhuta Shah & Co. “The weakness in Indian laws, especially GST, with its ever-evolving structure, is being exploited to the fullest by platforms that deal in new-age digital transactions.”

According to a December 29, 2021, Blockchain.News reported Indian central bank had announced fresh plans to introduce a basic CBDC initially before implementing a more sophisticated version as the country struggles to regulate cryptocurrencies.

On December 28, 2021, the Reserve Bank of India released a report called “Trend and Progress of Banking in India 2020-21″ and further elaborated on the regulator’s plan of a Central Bank Digital Currency.

The report states, “in its basic form, a central bank digital currency (CBDC), provides a safe, robust and convenient alternative to physical cash. In comparison with existing forms of money, it can offer benefits to users in terms of liquidity, scalability, acceptance, ease of transactions with anonymity and faster settlement.”

While India has witnessed an increase in the popularity of cryptos, the nation’s judiciary is not in favour of supporting them.

The country now has more than ten crore crypto owners in the world, according to broker discovery and comparison platform BrokerChooser. The total number of crypto owners in India currently stands at 10.07 crore, which puts it ahead of every other country in the world, India Today reported.

According to a report from Blockchain.News on December 7, 2021, despite the recent progress being made with respect to the regulations of digital currencies in India, a Lok Sabha lawmaker, Nishikant Dubey, advocated that the nation should ban cryptocurrencies rather than embrace these nascent assets through regulation.

“From 2013-14, our member Shivkumar Udasi has been contending that this should be stopped, it is based on darknet technology, and this would only be used for drugs, prostitution, terrorism, arms,” Mr Dubey said, adding that “the whole world is troubled by it. The RBI has been saying continuously that this should be completely banned.”

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CFTC Examines Whether Binance Illegally Brokered Trades for US Users

Key Takeaways

  • The CFTC has not formally accused Binance of illegally brokering trades for U.S. residents.
  • Social media content indicates that U.S. residents can indeed use Binance through VPNs, but it is unclear if Binance is accountable for this.
  • Binance was accused last year of evading U.S. regulations, and Coinbase has implied that the exchange has lax compliance.

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The Commodity Futures Trading Commission (CFTC) in the U.S. is investigating Binance to determine whether the exchange illegally facilitated trading for U.S. residents.

Binance Under Investigation

Binance isn’t registered with the CFTC and is not authorized to allow derivatives trading by U.S. residents. The U.S. regulator views cryptocurrencies like Bitcoin and Ethereum as commodities, giving the agency jurisdiction over trading products derived from those commodities.

As of yet, the CFTC has not leveled any accusations. However, the probe indicates that U.S. regulators are keeping a sharp eye on Binance.

In November, a Forbes article alleged that Binance might have established a U.S. subsidiary company to evade U.S. regulations deliberately. Binance denied that the documents leaked by Forbes came from the exchange, suing multiple Forbes journalists before dropping the case last month.

U.S. residents are blocked from using the Binance website directly, although content on Reddit and YouTube indicates that users can get around this by using a VPN.

“We take a collaborative approach in working with regulators around the world and we take our compliance obligations very seriously,” Binance said.

While crypto adoption has come leaps and bounds in recent years, regulators have only just begun to catch up with the developing technology. The CFTC recently sued BitMEX for failing to register as a broker, and rival exchange Coinbase is also under CFTC investigation, ending margin trading last year to comply with CFTC rules.

SIMETRI 10x potential

In a February 2021 Form S-1 filing with the SEC, Coinbase called Binance out for an apparent lack of regulatory compliance. The filing stated Coinbase competes with “several companies that solely focus on the crypto market and have varying degrees of regulatory adherence, such as Binance.”

Binance exists as multiple entities headquartered in different jurisdictions worldwide, making regulation and investigation more complex than with most companies. However, recent CFTC activity suggests that regulators will not be easily dissuaded.

Disclosure: The author held Bitcoin at the time of press.

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New IRS Operation Threatens Crypto Tax Dodgers With Jail

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A newly launched IRS initiative called Operation Hidden Treasure was announced on Friday as part of a crackdown on widespread crypto tax evasion.

IRS Searching For Telltale Signs of Tax Evasion

Operation Hidden Treasure was announced at a Federal Bar Association presentation on fraud on March 05. The operation is specifically designed to root out people using crypto and virtual currency to evade taxes.

Carolyn Schenck of the IRS stated that the agency was looking for “tax evasion signatures.” These include structuring financial activity in blocks of $10,000 or less in order to fly under the radar of the IRS and its Form 8300 requirements.

While exchanges like Coinbase, for example, report tax information to the IRS with accounts over a certain transaction and balance threshold, the IRS is now training operatives to search for signs that crypto users are willfully avoiding detection.

Schenck stated that the IRS is using specialist vendors and trained agents to analyze and de-anonymize crypto transactions so that they can track and seize crypto in “both a civil and a criminal setting.”

“We see you,” she added, sending a message to traders attempting to evade taxes.

Nexo Earn

Jail Time for Crypto Tax Dodgers

IRS Criminal Investigation Division Chief James Lee spoke at the presentation, outlining the consequences of tax evasion.

“People have to know there’s a consequence for being willfully noncompliant,” said Lee, “and that consequence is going to jail.”

If the government cannot prove that tax evasion was deliberate, there are still civil consequences including a 75% penalty on the understated tax.

Solicitor Steve Tosher stated that “We expect to see more referrals for criminal prosecution and assertions of the 75% civil fraud penalty.”

Of course, the crypto tax procedure is notoriously opaque, with many users unclear on how to pay crypto taxes.

For those with undisclosed crypto taxes, consulting a tax lawyer is perhaps the best option. Crypto users would do well to remember that they do not share attorney-client privileges with their accountants, and their accountants could be summoned to testify against them. This is not the case with tax lawyers.

SIMETRI 10x potential

The IRS recently stated that it’s not necessary to pay taxes on Bitcoin buys made in dollars, offering U.S. citizens a way to reduce their crypto taxes. However, the new operation may mark the dawn of a new era for crypto taxes.

The government has been slow to catch up with the crypto industry, but regulation has finally arrived.

“These transactions are not anonymous,” said Schenck. “We see you.”

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