India's Tax Department Cracks Down on Unreported Crypto Income

The Income Tax Department of India has initiated a significant crackdown on individuals who have failed to report their cryptocurrency income. Thousands of individuals have received notices, and the department is now equipped with actual data and transaction records through its NUDGE framework (Non-Intrusive Usage of Data to Guide and Enable).

In the past, the tax department sent bulk emails urging people to update their income tax returns (ITR). However, with the advancement of data analytics and blockchain tracing, the government is now targeting those who have not reported their crypto income despite the deduction of TDS under Section 194S of the Income Tax Act. According to Ravi Sawana, Partner at Lakshmikumaran & Sridharan, “Transactions in cryptocurrencies on which TDS has been deducted under Section 194S have not been declared in the ITR for FY 2023-24. Hence, taxpayers are being asked to update their filings.”

Some individuals have already experienced search and seizure operations. In several cases, hardware wallets were confiscated. Priyanka Jain, Partner at Vsih & Associates, explained that the department invoked Section 131 of the Income Tax Act to search premises. Officials requested full disclosure of wallet holdings, mining data, foreign trading, and all transactions. Despite cooperation, a follow-up notice was issued due to the department’s suspicion of underreporting.

If you’re a crypto investor, trader, or miner in India, here’s exactly how to report your crypto earnings in your Income Tax Return (ITR) and stay compliant with the law. First, choose the correct ITR form based on how you earn from crypto. ITR-2 is used if your crypto income is from long-term or short-term capital gains, while ITR-3 is used if you’re actively trading crypto or earning from it as a business activity. Using the wrong form can lead to rejection or scrutiny from the tax department.

Next, declare all crypto income sources, including buying and selling of cryptocurrencies, mining rewards, airdrops and staking rewards, crypto received or used as payment, and profits from holding or long-term investment gains. Even small or irregular income must be reported to avoid penalties. All crypto income in India is taxed at a flat 30% rate under Section 115BBH, regardless of your income bracket. Additionally, no deductions (except cost of acquisition) are allowed, and a surcharge and 4% health and education cess will also apply.

Crypto exchanges are required to deduct 1% TDS (Tax Deducted at Source) on every transaction under Section 194S. You should download your Form 26AS from the income tax portal, cross-check all TDS entries related to your crypto trades, and ensure all deductions are credited to your PAN account. Maintain detailed and organized records of your crypto activity, including wallet addresses, screenshots of transactions, exchange trading history, foreign exchange logs, and details of P2P or OTC transactions. This will help in case of audits or further inquiries by the Income Tax Department.

Finally, submit your ITR before the due date (usually July 31st for individuals). Filing late can attract penalties and interest—even if the tax is already paid. By following these steps, crypto investors can stay compliant and avoid penalties and legal trouble.