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India’s Income Tax Department has intensified its efforts to address potential tax evasion and money laundering associated with virtual digital assets (VDAs), including cryptocurrencies. In a recent move, the department has identified individuals and entities conducting crypto transactions who have failed to comply with the Income Tax Act, 1961.

Income Tax Department Targets Crypto Non-Compliance

The Central Board of Direct Taxes (CBDT) has issued emails to thousands of taxpayers, urging them to review and correct their income tax returns if income from crypto transactions was misreported or omitted. This initiative is part of CBDT’s ongoing NUDGE campaign, which aims to encourage voluntary compliance among taxpayers.

This marks the third NUDGE campaign in six months, with previous drives focusing on foreign asset disclosures and inaccurately claimed political donation deductions. The latest efforts specifically target inconsistencies in crypto-related income reporting.

Taxation of Cryptocurrencies in India

Although cryptocurrencies are not recognized as legal tender in India, income from VDAs has been taxable since April 2022. According to Section 115BBH of the Income Tax Act, income from crypto transactions is taxed at a flat 30%, with no deductions allowed except for the cost of acquisition. Importantly, losses from crypto investments cannot be offset against other income or carried forward to future financial years.

Discrepancies in Tax Filings

Government officials have revealed that data analytics tools are uncovering mismatches between income tax returns and tax deducted at source (TDS) filings by crypto exchanges and other Virtual Asset Service Providers (VASPs). These discrepancies include:

  • Failure to file the mandatory Schedule VDA.
  • Declaring crypto income at lower tax rates.
  • Wrongly claiming deductions that are not permissible under the law.

Such inconsistencies are raising concerns about the potential misuse of unaccounted income in high-risk crypto investments. The crackdown aims to ensure compliance and improve transparency in the rapidly growing cryptocurrency sector.

Regulatory Uncertainty Surrounding Cryptocurrencies

While India continues to explore regulatory options for VDAs, including a possible ban, the government has emphasized that taxation does not imply formal approval or legal recognition of cryptocurrencies. A discussion paper is reportedly under development to address regulatory challenges and provide a framework for oversight.

The government’s efforts to tighten oversight come amidst growing global scrutiny of cryptocurrencies, particularly regarding their role in tax evasion, money laundering, and other illicit activities. As the cryptocurrency landscape evolves, compliance with tax regulations will remain a critical area for both individuals and businesses engaged in digital asset transactions.

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