As cryptocurrencies and other virtual digital assets (VDAs) become increasingly popular among Indian investors, the Income Tax Department has tightened disclosure and compliance rules around crypto transactions.
Experts say incorrect disclosure, mismatch in TDS details, or failure to report crypto income can lead to notices, penalties, and tax demands, making proper reporting and reconciliation essential for VDA investors and traders.
What are Crypto Currencies as per Income Tax Department
Under the Income Tax Act, cryptocurrencies and NFTs are classified as “Virtual Digital Assets (VDAs).” To define this category, Section 2(47A) was introduced in the Act. Broadly, the section covers any information, code, number, or token generated through cryptographic means, excluding Indian and foreign fiat currencies.
Popular cryptocurrencies include Bitcoin, Ethereum, Litecoin, Dogecoin, Ripple, and Polygon.
How are gains from Virtual Digital Assets transactions taxed in India
Income arising from the transfer of Virtual Digital Assets is taxed at a flat 30 percent under Section 115BBH of the Income Tax Act, 1961, along with applicable surcharge and cess. This taxation framework operates separately from the normal slab-rate system and applies specifically to gains from VDA transfers.
Additionally, Section 194S of the Income Tax Act, 1961, mandates a 1 percent TDS on specified VDA transfers. This TDS is not an additional levy, but a tax credit that can generally be claimed while filing the return.
“A significant compliance point is the restriction on loss adjustment. Losses arising from VDA transactions cannot be set off against other income heads (not even other crypto income), nor can they typically be adjusted in the same manner as conventional capital losses. Taxpayers should therefore avoid assuming that crypto losses can reduce salary, business, or other taxable income,” an tax expert said.
Tax implications may also arise in cases involving gifts or transfers without consideration. Where the value exceeds prescribed thresholds and no exemption applies, the recipient could face taxation under applicable gift-tax provisions. Proper documentation of such transfers remains critical from a compliance standpoint.
Disclosing TDS in ITR
According to reports, 6.45 lakh individuals were subjected to TDS on crypto transactions in FY23, but only 1.39 lakh disclosed such income in their returns. This leads to a question what happens when one does not disclose crypto TDS in ITR?
“A section of traders still believes that crypto is largely “off-the-radar,” not realising that the department now links exchange-level TDS, AIS, and other digital trails to identify high-value or repeated transactions. Add to this fear of complex calculations, notice-risk, and the lack of standardised guidance for P2P or DeFi-style trades, and it becomes easier for some to simply underreport or not report crypto income at all,” she  said.
Tax experts suggest crypto traders should report crypto TDS in ITR. If crypto TDS is not disclosed in the Income Tax Return, it can create a mismatch between the tax deducted and the income reported, which may trigger a notice from the Income Tax Department.
“Even if 1 percent TDS has already been deducted on a crypto transaction, taxpayers must still report the VDA income correctly in the return. TDS is only a tax credit; it does not replace disclosure of the transaction itself,” she said.
If the TDS credit is missing from the return, the refund may get reduced, or processed incorrectly. If the underlying crypto income is also not reported, the department may treat it as underreported income, which can lead to tax demand, interest, and possible penalty.
The safest approach is to reconcile exchange statements, Form 26AS, and AIS before filing, and make sure both the crypto income and the TDS credit are reflected correctly in the return.
key disclosure requirements for reporting crypto
Taxpayers must ensure complete and accurate disclosure of all VDA transactions in their income tax returns, including details such as date of acquisition and transfer, sale consideration, cost of acquisition, and resulting gains or income. It is equally important to reconcile TDS deducted on crypto transactions with Form 26AS and AIS, as exchange-level reporting is increasingly under the scrutiny of the tax department.
“The choice of ITR form depends largely on the nature and frequency of crypto activity. Where crypto is held primarily as an investment, taxpayers can report such income in ITR-2. However, where transactions are frequent and resemble systematic trading activity, ITR-3 is more appropriate, as the income may be treated as business income,” she said.
The key principle is that investor-style activity and trader-style activity should not be mixed. The reporting position, supporting documentation, and ITR selection should align with the actual nature of the transactions.
