Crypto Gains Under Scanner: Income Tax Dept Flags Undisclosed Digital Asset Income

Thousands of crypto investors who did not report their digital asset gains properly are now in the crosshairs of the Income Tax Department. According to some media reports, the Central Board of Direct Taxes (CBDT) has begun a fresh crackdown on individuals and entities who may have used cryptocurrency to quietly park unaccounted money, and failed to disclose it in their tax returns.

The reports note that this probe primarily focuses on high-risk cases income from Virtual Digital Assets (VDAs), like Bitcoin or Ethereum, may have slipped through the tax net. Several taxpayers who did not file details of their crypto holdings or gains under the mandated ‘Schedule VDA’ in their income tax returns have already received emails urging them to come clean.

What are the rules regarding Crypto Taxation?

It is important to note that these reminders are not random. Tax officials have been matching returns filed by individuals with the data submitted by crypto exchanges, officially known as Virtual Asset Service Providers (VASPs). This includes details from Tax Deducted at Source (TDS) filings, which became mandatory for certain crypto transactions. Where the numbers don’t line up, taxpayers may be selected for further scrutiny.

Since April 2022, income from crypto transfers has been subject to a flat 30 per cent tax under Section 115BBH of the Income-tax Act, 1961. There is no room for deductions, apart from the cost of acquisition, and you can't set off crypto losses against other income.

Still, many taxpayers seem to be either unaware of these rules or deliberately bypassing them.

As per reports, the most common lapses in crypto asset reporting includes claiming indexation benefits (which are not allowed for VDAs), reporting crypto income under lower tax slabs and leaving out Schedule VDA entirely.

In some cases, Schedule VDA was omitted even when TDS had already been deducted by the crypto exchange. This omission has now triggered investigations by the tax officials.

This scrutiny by the CBDT is a broader data-driven compliance strategy, known as the NUDGE campaign (Non-intrusive Usage of Data to Guide and Enable). The initiative aims to prompt taxpayers towards voluntary corrections.

Moreover, this crypto-focused scrutiny follows CBDT's recent crackdown on foreign assets and suspicious claims under Section 80GGC.