CBDT identifies undisclosed virtual digital assets worth Rs 889 crore; Here’s how to report earnings from crypto in ITR

Tax analysts say that the underreporting or non-disclosure of crypto assets carries risk, especially at a time when tax authorities are closely tracking crypto activities.

The Central Board of Direct Taxes (CBDT) has identified undisclosed income worth Rs 888.82 crore from virtual digital assets (VDAs) —which include cryptocurrency and other non-fungible tokens stored, invested, and traded on blockchain technology. The tax authority has sent 44,507 communications to those identified taxpayers as a warning to disclose such income in Schedule VDA of their Income Tax Return (ITR) filing.

The details shared by the Ministry of Finance recently revealed that the CBDT made the communication as part of their campaign, NUDGE (Non-Intrusive Usage of Data to Guide and Enable). The tax regulator would send SMSs and emails as a final call for taxpayers to review and revise their filing for (AY) 2024-25 before the year ends.

Under the Prevention of Money Laundering (PMLA) Act 2002, virtual asset service providers (VASPs) are required to submit specified and suspicious transaction reports to the Financial Intelligence Unit - India (FIU-IND). These reports are then analysed and shared with law enforcement agencies for further action.

“Data analytics tools, project insight, and internal databases are used to match information on VDA transactions with disclosures in ITRs. The TDS returns filed by virtual asset service providers (VASPs) and taxpayers’ ITRs are also analyzed to identify discrepancies and take appropriate action,” Pankaj Chaudhary, minister of state under the finance ministry, told Lok Sabha in a written reply.

MoS Chaudhary highlighted that the Enforcement Directorate— upon investigation of several crypto-related cases under PMLA —has attached, seized, or frozen proceeds of income from VDAs worth Rs 4,189.89 crore. So far, 29 persons have been arrested, and 22 prosecution complaints filed. One accused has been declared a fugitive economic offender.

The MoS was replying to the unstarred question raised by the member of Parliament, Anand Bhaduaria, on the issue of large-scale flow of black money routed through cryptocurrency, and action taken by the government.

The minister clarified that the government does not collect data on crypto assets or VDAs as they are unregulated in India. He reasons that these assets are inherently borderless and that they require strong international coordination to prevent regulatory arbitrage.

“Therefore, any regulatory framework for crypto assets can be effective only with significant international collaboration on the evaluation of the risks and benefits, and the evaluation of common taxonomy and standards,” the minister stated in a written reply.

Tax analysts say that the underreporting or non-disclosure of crypto assets carries risk, especially at a time when tax authorities are closely tracking crypto activities.

Shefali Mundra, Tax Expert at ClearTax, said, “India’s tax rules for cryptocurrencies and other virtual digital assets (VDAs) are very clear. Anyone who buys, sells, spends, or exchanges crypto must report these earnings in their ITR. The Income Tax Department has introduced a separate Schedule VDA in the ITR forms, and this is where all crypto-related income must be disclosed.”

The Finance Act 2022 introduced the concept of virtual digital assets (VDAs), which includes investment and trading of cryptocurrencies and other non-fungible tokens (NFTs). As per the Income Tax Act, 1961, Section 115BBH, gains from transfers— selling, swapping, or spending VDAs —are taxed at a flat 30 percent rate plus 4 percent cess, irrespective of holding period or income slab. It is also mandatory to disclose the cost of acquisition and pay a 1 percent TDS on eligible transactions.

“Taxpayers should report these gains under the ‘Income from Other Sources’ or ‘Capital Gains’ schedule, depending on the nature and frequency of their transactions. Since losses cannot be offset against other income, maintaining detailed records of each trade, wallet address, and exchange statement becomes crucial.

“Proactive and accurate reporting of VDAs not only ensures compliance with Section 115BBH but also protects taxpayers from penalties as regulatory scrutiny around VDAs continues to increase,” said Aditya Bhattacharya, Partner at King Stubb & Kasiva, Advocates and Attorneys.

Here are suggestions from Rajarshi Dasgupta, Executive Director (Tax) at Aquilaw, on the process to report VDAs, as follows:

• For a salaried investor with crypto capital gains, one can use ITR 2. 
• For business income, file ITR 3. 
• ITR 2 and ITR 3 Excel utilities for FY 2024-25, (AY) 2025-26, include Schedule VDA for crypto or NFT disclosure.
• In Schedule VDA, report each transfer, including acquisition date, sale date, cost of acquisition, and proceeds. 
• Schedule TDS should include 1 percent TDS withheld, often auto-populated, but should be verified.

The tax expert warned that failure to declare crypto income may result in it being treated as undisclosed income with up to 60 percent tax penalty plus cess and surcharge.