India Intensifies Crypto Tax Crackdown With 30% Rate

India’s Income Tax Department has intensified its efforts to combat potential tax evasion and money laundering related to virtual digital assets, with a particular focus on cryptocurrencies. This initiative follows the identification of individuals and entities involved in crypto transactions who have not adhered to the Income Tax Act, 1961. The Central Board of Direct Taxes has taken proactive measures by sending emails to thousands of individuals, urging them to review and update their income tax returns if they have misreported or omitted crypto income. This campaign is part of the broader NUDGE initiative, which aims to promote voluntary compliance among taxpayers.

This is the third NUDGE campaign in the past six months, with previous efforts targeting foreign asset disclosures and false political donation deductions. The government's stance on cryptocurrencies remains clear: while they are not recognized as legal tender, income derived from virtual digital asset transfers has been subject to taxation since April 2022. Under Section 115BBH of the Income Tax Act, crypto income is taxed at a flat rate of 30%, with no deductions allowed except for the cost of acquisition. Additionally, losses from crypto transactions cannot be offset or carried forward.

The crackdown has revealed discrepancies through data analytics, including mismatches between income tax returns and tax deducted at source filings by crypto exchanges, or Virtual Asset Service Providers. Some taxpayers have failed to file the mandatory Schedule VDA or have declared crypto income at lower tax rates, while others have incorrectly claimed deductions. These findings highlight broader concerns over the use of unaccounted income in high-risk crypto investments. While the government is exploring regulatory options for virtual digital assets, including a possible ban, it has made it clear that taxation does not imply formal approval of cryptocurrencies.

This enforcement push underscores India's commitment to ensuring compliance with tax laws, even as the regulatory landscape for virtual digital assets remains uncertain. The government's proactive approach aims to address potential tax evasion and money laundering, while also encouraging transparency and accountability in the crypto space. As the discussion paper on regulatory options for virtual digital assets is being developed, the focus on tax compliance serves as a reminder of the need for vigilance and adherence to legal requirements in the rapidly evolving world of digital assets.