As the income tax return (ITR) filing season progresses, many cryptocurrency investors in India are receiving tax notices from the Income Tax Department. Experts emphasize that these notices often stem from discrepancies between the 1% Tax Deducted at Source (TDS) and the actual income reported by investors, rather than deliberate evasion.
Pranav Pagaria, SVP - Finance & Strategy at CoinDCX, advises investors who receive a crypto-related tax notice to promptly verify their records and respond with complete documentation. He highlights that accurate record-keeping, including transaction history, TDS certificates, and gain/loss statements, is crucial for addressing such queries effectively.
Don't Mistake TDS for Final Tax Liability
A significant oversight among crypto investors is assuming that the 1% TDS deducted under Section 194S fulfills their entire tax obligation. According to Pagaria, investors must still calculate and pay the full 30% tax on gains from Virtual Digital Assets (VDAs) under Section 115BBH when filing their returns.
Failing to reconcile transactions across multiple exchanges or wallets can also lead to mismatches in reported income, increasing the likelihood of receiving a tax notice.
What Crypto Transactions Are Taxable?
Indian tax laws apply to a broad spectrum of crypto transactions. These include:
- Buying goods or services with cryptocurrency
- Exchanging one cryptocurrency for another
- Trading crypto using Indian rupees
- Receiving crypto as payment for services
- Receiving digital assets as gifts
- Mining cryptocurrencies
- Earning salaries in crypto
- Staking rewards and airdrops
Since the Financial Year 2022-23, gains from VDAs, including cryptocurrencies and NFTs, are taxed at a flat rate of 30%, irrespective of the taxpayer's income slab. An additional 4% health and education cess also applies. Notably, no deductions are permitted except for the cost of acquisition, and losses from crypto transactions cannot be offset against other income or carried forward to future years.
Section 194S mandates a 1% TDS on specified crypto transactions exceeding ₹10,000 in a financial year for most taxpayers, with a higher threshold of ₹50,000 for specified individuals and Hindu Undivided Families (HUFs). While this TDS can be claimed as credit during ITR filing, investors are responsible for calculating and paying any remaining tax due.
Reporting Crypto in Your ITR
From Financial Year 2025-26 onwards, taxpayers are required to disclose crypto gains separately under a new Schedule VDA in their income tax returns. Furthermore, exchanges are now mandated to furnish transaction details directly to tax authorities, making accurate and comprehensive reporting more critical than ever.
Experts recommend maintaining consolidated records of all transactions across various exchanges and wallets, preserving TDS certificates, and gain/loss statements. Accurately reporting every taxable crypto transaction will significantly minimize the risk of receiving a tax notice and ensure compliance with evolving regulations.