CBDT Launches Crackdown on Undeclared Crypto Income in India

The Central Board of Direct Taxes (CBDT) in India has launched a comprehensive investigation into individuals and entities that have failed to report income derived from Virtual Digital Assets (VDAs), including cryptocurrencies. This initiative is part of a broader effort to ensure compliance with tax laws and combat financial crimes involving digital assets.

The CBDT has identified widespread non-compliance related to crypto income and has sent notices via email to thousands of individuals, urging them to review and update their Income Tax Returns (ITRs). A senior CBDT official confirmed that the department has taken this step to address the issue of undeclared income from VDA transactions, which violates provisions under the Income Tax Act, 1961.

This enforcement action is part of the CBDT’s NUDGE initiative (Non-Intrusive Usage of Data to Guide and Enable) under Section 80GGC. The focus is to detect tax evasion and money laundering in crypto activities. Key triggers for the crackdown include large crypto trades not matched with income disclosures, the use of undisclosed offshore wallets, crypto profits converted into cash with no tax reporting, and the lack of foreign asset declaration by traders. This action aligns with the Indian government’s efforts to bring transparency to the digital asset ecosystem and combat financial crimes involving crypto.

If you’ve received a notice or believe your crypto income is not properly declared, it is advisable to review your past ITRs for any undeclared crypto gains, gather records of all VDA transactions, and file an updated return using ITR-U under Section 139(8A). Declaring crypto income separately from other capital gains for clarity can help avoid penalties and formal investigations. The CBDT has made it clear that this is a final reminder. Those who fail to respond to the notice may be subjected to verification or in-depth scrutiny.

This action signals a stricter enforcement environment for crypto users in India. As virtual assets grow in popularity, the tax department is stepping up efforts to ensure transparency and legal compliance. The CBDT is matching the ITRs filed by taxpayers with TDS returns filed by Virtual Asset Service Providers (VASPs), commonly known as crypto exchanges. Defaulters may be shortlisted for further verification or scrutiny. This data-driven approach ensures that any discrepancies in reporting are identified and addressed promptly.

The CBDT has also launched a new initiative under its NUDGE (Non-intrusive Usage of Data to Guide and Enable) Taxpayers programme, which aligns with its TRUST Taxpayers FIRST philosophy. This is the third NUDGE campaign launched in the last six months, with previous campaigns targeting foreign asset/income declarations and bogus deduction claims under Section 80GGC. The NUDGE programme aims to encourage voluntary compliance through non-intrusive methods, leveraging data analytics to guide taxpayers towards fulfilling their tax obligations.

Under Section 115BBH of the Income-tax Act, 1961, which was introduced via the Finance Act of 2022, a flat 30% tax (plus applicable surcharge and cess) is levied on income from the transfer of VDAs. This provision disallows any deductions except for the cost of acquisition. Additionally, losses from VDA investments or trading cannot be set off against other income or carried forward to subsequent years. This stringent tax regime has put investors in a tight spot, as they are now required to declare their crypto income accurately to avoid penalties.

The crackdown on crypto tax evasion comes at a time when India's crypto market is expected to grow significantly. However, the tough tax regime has led many users to shift to global platforms, as they seek to avoid the stringent reporting requirements and high tax rates imposed by Indian authorities. This trend highlights the challenges faced by regulators in balancing the need for tax compliance with the growing popularity of digital assets.