Summary of this article
Disclose carefully: Report crypto income under Schedule VDA and holdings on foreign exchanges or wallets under Schedule FA, where applicable.
Match the data: Ensure ITR disclosures align with AIS, Form 26AS, exchange reports, and bank statements.
Maintain records: Keep detailed transaction logs, wallet histories, and TDS details to support filings.
Correct early: Use revised or updated returns to fix omissions before penalties escalate.
In recent years, the Income Tax Department has intensified its efforts to monitor foreign income and assets held by Indian residents. By leveraging and continually strengthening global data-sharing frameworks such as the Common Reporting Standard (CRS) and the Foreign Account Tax Compliance Act (FATCA), the department has tightened checks on offshore tax evasion. Together, these mechanisms enable tax authorities to more effectively identify undisclosed foreign income and assets, track overseas investments and earnings, and monitor crypto holdings maintained abroad.
Against this backdrop, the Finance Ministry has recently revealed that over 44,000 taxpayers have been flagged for failing to report their virtual digital asset (VDA) transactions in income-tax returns, even as enforcement actions and tax collections from the sector continue to surge.
Do taxpayers need to declare crypto held in overseas exchanges or wallets under Schedule FA?
In recent years, cryptocurrency investing and trading have surged in India. People are actively buying Bitcoins and other such currencies, but might not be reporting the same correctly in their income tax returns.
“At present, it is not entirely clear whether transferring cryptocurrencies from an Indian exchange to a foreign wallet qualifies as a permissible transaction under India’s stringent foreign exchange regulations. There is also no clarity on whether cryptocurrencies should be classified as ‘assets’ and, if so, whether their situs would be considered within India or outside it. This regulatory ambiguity continues, as the CBDT has not issued any explicit crypto-specific foreign asset disclosure rules. However, on a prudent basis, crypto holdings should be disclosed in income-tax returns to mitigate potential risks under FEMA and the Black Money Act,” says Sofiya Syed, Senior Tax Manager, Direct Tax Division, Dewan PN Chopra & Co.
However, crypto held in overseas exchanges or wallets can be qualified as foreign assets, which need proper disclosure in Schedule FA of ITRs.
Under Schedule FA, foreign custodial accounts are reported. Therefore, in prudence, crypto on foreign exchanges (e.g., Binance, Coinbase, KuCoin, Kraken) can be treated as foreign custodian accounts, and the value as on 31st March must be reported under the FA Schedule.
“While filing their ITRs, people may report cryptocurrencies in Schedule VDA but skip reporting the same in Schedule FA even when the same is held in foreign currency. Schedule VDA is applicable when there is income from cryptocurrencies, that is, an asset is sold and profit is generated. Schedule FA is applicable when you hold cryptocurrency in a foreign jurisdiction. The purpose of both schedules is different, and both could apply simultaneously,” says Syed.
Anyway, taxpayers should not ignore even small transactions, including a crypto trade worth as little as Rs 1,000, as it is taxable and must be reported.
Non-reporting of any asset classified as a foreign asset carries serious consequences under the Black Money Act, including substantial penalties. Taxpayers should, therefore, exercise extreme caution and ensure proper disclosures while filing their income-tax returns.
What steps should a taxpayer take upon receiving a notice for non-reporting or a mismatch in VDA disclosures?
First of all, the taxpayer needs to check the flagging made in the notice issued and the reason for the same. Such notices from the I-T department have strict timelines, and one should always prepare a response before the due date to avoid escalation.
The taxpayer should keep necessary documents ready, such as transaction history, wallet details, exchange reports, Deposit and withdrawal history, complete trade history, ledger statements, and account statements for the year.
Reasons for such notices may include:
i) Mismatch in AIS and Form 26AS - A frequent trigger for a notice is a discrepancy between ITR and the records in AIS or Form 26AS. Exchanges report TDS details directly to the I-T department. If your ITR does not reflect the same entries, the system automatically flags it. Even a small unreported transaction can lead to such a notice.
ii) Incorrect Reporting in ITR - If the taxpayer has filed his return using the wrong ITR form or did not declare crypto income in the right schedule, the department treats it as an error.
iii) High Value Transactions – Large deposits or withdrawals in a bank account that do not align with the income declared in the return often trigger scrutiny. “Such movements are flagged as high-value transactions, particularly when they involve transfers to or from crypto exchanges. If these transactions are not adequately explained in the return, the tax department may seek clarification,” informs Syed.
iv) Failure to Deduct or Report TDS - The law mandates a 1 per cent TDS on virtual digital asset (VDA) transactions under Section 194S. If an exchange does not deduct TDS, or if the taxpayer conducted direct buying/selling without an exchange and has not reported it, this becomes a compliance issue. The department uses exchange reports and bank records to catch such gaps, which may then result in a notice.
The taxpayer should have all the required documents while filing the proper response, and the same will support the explanations given in the reply also.
“If tax notices are issued at the income tax portal, then all responses must be submitted online through the e-filing portal under the ‘Pending Actions’ tab. If the discrepancy identified by the notice is valid, the taxpayer must settle the demand by taking necessary actions,” says Syed.
What kind of transaction logs, exchange statements, and wallet records should taxpayers maintain to stay compliant during future assessments?
Taxpayers dealing in virtual digital assets should keep clear records of all crypto activities to stay compliant. This includes maintaining detailed transaction logs (date, time, asset type, quantity, price, fees, and transaction hashes), exchange statements (trade reports, deposits/withdrawals, ledger summaries, and TDS records), and wallet records from self-custody wallets showing balances and on-chain transaction history. These records help accurately compute VDA income, support disclosures in the ITR, and prevent the risk of transactions being treated as unexplained under Section 69A.
Can taxpayers revise or file an updated return to correct missed VDA disclosures?
If a taxpayer has missed reporting virtual digital assets such as cryptocurrency in their income tax return, they can generally correct this omission by filing either a revised return or an updated return, depending on the timeline.
A revised return under Section 139(5) can be filed if the original or belated ITR was submitted on time. This revised return must be filed on or before 31 December of the relevant assessment year, or before the assessment is completed, whichever is earlier. Within this window, taxpayers may revise their returns any number of times, and the latest revised return replaces the previous one.
“If the deadline for filing or revising an ITR has already passed, taxpayers may still correct missed VDA disclosures by filing an updated return (ITR-U) under Section 139(8A). This can be filed within 48 months from the end of the relevant assessment year. However, an updated return can be used only to disclose additional income—not to claim extra refunds or increase losses—and once filed, it cannot be revised,” informs Syed.
For this reason, filing a revised or updated return becomes advisable when you discover that VDA holdings, gains, or related transactions were omitted.
Possible penalties or prosecution risks for under-reporting or non-reporting of VDA income and assets
Section 2(47A) of the Income Tax Act defines a virtual digital asset (VDA) as any digital code, number, or token created through cryptographic means, which provides a digital representation of value. An amendment to Section 158B included VDAs in the definition of “undisclosed income.”
If the taxpayer fails to report or under-report VDA income, the same can lead to multiple consequences. Any unpaid tax attracts interest under Sections 234A/B/C until the dues are cleared.
If the taxpayer has under-reported the income, a penalty of 50 per cent of the tax payable may apply, which can increase to 200 per cent in cases of misreporting under Section 270A.
Where VDA gains or holdings are not reported at all, the income tax department may classify them as unexplained income under Sections 69A and 115BBE. Such income is taxed at 60 per cent, along with applicable surcharge and cess -effectively amounting to nearly 78 per cent - with no deductions or set-offs permitted.
Non-compliance with TDS requirements under Section 194S, such as failure to deduct or deposit TDS on VDA transactions, may further lead to interest and penalties equal to the TDS amount.
“If VDAs are held in foreign exchanges or wallets and not disclosed in Schedule FA, penalties under the Black Money Act can be severe, up to Rs 10 lakh for each year,” says Syed.
In extreme cases involving large amounts or wilful evasion, prosecution may also be initiated, carrying a potential imprisonment of three months to seven years.
Overall, timely reporting and full disclosure of all VDA income and assets remain the simplest way to avoid penalties and ensure peace of mind.
