Virtual Digital Assets Under Tax Lens: What Every Investor Must Know

You may be under the lens of the tax department if you invest in virtual digital assets (VDA) (cryptocurrency). According to sources, the tax department is probing evasion and laundering in the space of cryptocurrencies during assessment years  2023-24 and 2024-25.

How Are Virtual Digital Assets Defined 

The term virtual digital assets has been defined technically and comprehensively under the Income-tax Act, 1961, as:

a) Any cryptographically generated information, code, number, or token that digitally represents exchanged value. Such digital assets intrinsically hold value, operate as a reliable store of wealth or a standard unit of measure (applicable in financial dealings and investments), and are capable of electronic transfer, storage, or exchange.

b) A non-fungible token (NFT) or any comparable digital token; and 

c) Any digital asset embodying value that utilizes a cryptographically secured distributed ledger or similar technological framework for verifying and safeguarding its transactions. (This specific part becomes applicable starting April 1, 2026.)

How Are Virtual Digital Assets Taxed 

“Individuals who invest in VDAs face significant consequences, as any income earned from transferring these assets is subject to a 30 per cent tax rate. Interestingly, the Income-tax Act does not allow the deduction of expenses incurred in generating the income from VDAs. Furthermore, any losses incurred on the transfer of VDAs can neither be carried forward nor can they be set off against any other income,” says Shashank Sharma, advocate, Supreme Court of India. 

In case such income is unaccounted/undeclared and is subsequently discovered by the Income Tax Department during assessment, then there may be a penalty of 50 per cent or 200 per cent. However, where such unaccounted/undeclared is discovered during the course of a search, the penalty will be for multiple years, depending on the facts of the case, and thus, on a cumulative basis, may be higher.

Additionally, there will be implications for the levy of interest.

“Furthermore, it needs to be noted, where the investment has been in the VDAs from undisclosed/unaccounted sources, the tax incidence shall be 60 per cent in addition to penalty and interest as may be levied,” says Sharma.

How The Government Is Keeping Track Of Virtual Digital Assets 

The government has implemented many initiatives to monitor crypto transactions, including obligating virtual digital asset service providers under the Prevention of Money Laundering Act, 2002, inter alia, to register with the Financial Intelligence Unit of India, undertake customer due diligence, monitor transactions, and submit reports of crypto transactions, etc.

“Similarly, the IT Act also obligates buyers/brokers/crypto exchanges to withhold tax from payments made pursuant to such transfer of VDAs. Thus, using the data collected through these initiatives, the government is verifying the ITRs/submissions made by taxpayers & building cases of tax evasion and money laundering linked to VDAs,” says Kunal Savani, partner, Cyril Amarchand Mangaldas.