Crypto traders beware: Tax notices are rolling out over undisclosed gains

Crypto profits are no longer invisible to tax authorities. The government has built a strong data trail with crypto exchanges and is cross-verifying transactions in real time.

If you’ve traded or invested in cryptocurrencies recently and failed to report the income in your Income Tax Return (ITR), you could be on the Income Tax Department’s radar. In a recent move, the department has sent emails and alerts to thousands of individuals who failed to declare crypto transactions in their ITRs for the financial years 2022–23 and 2023–24.

 

This outreach is part of the department’s “NUDGE” campaign – a friendly reminder initiative that encourages voluntary compliance. But don't be misled by the gentle tone — non-disclosure of income from cryptocurrencies could lead to scrutiny or penalties under tax evasion laws.

 

 

The Income Tax Department has sent a communication to thousands of individuals who have undertaken cryptocurrency transactions but failed to reflect this income in their returns, official sources said Friday.

These transactions pertain to assessment years 2023-24 and 2024-25, they said.

 

The department and its policy-making body, the Central Board of Direct Taxes (CBDT), suspect tax evasion and money laundering by certain "high-risk" people who are potentially using "unaccounted" income to invest in virtual digital assets (VDAs), commonly known as cryptocurrency.

 

Sources told PTI that the I-T Department has sent e-mails to thousands of defaulting people nudging them to file an updated Income Tax Return (ITR) if any income on account of crypto transactions has not been declared or mis-declared by them.

 

What has triggered the alerts?

According to official sources, the Central Board of Direct Taxes (CBDT) suspects that many taxpayers have either misreported or not disclosed income earned through crypto trading. Using data from crypto exchanges (Virtual Digital Asset service providers) and TDS (Tax Deducted at Source) returns, the department found inconsistencies between user declarations and the income reflected in transaction data.

 

“This is the third phase of the NUDGE campaign after reminders on foreign income and false deduction claims,” a source said, noting that the current focus is on “high-risk individuals potentially using unaccounted money to invest in virtual digital assets.”

 

The previous two were related to seeking correct declarations on foreign assets and income by taxpayers and withdrawal of bogus claims of deduction under section 80GGC of the I-T Act.

 

What Are the Tax Rules for Crypto?

Since April 1, 2022, India’s tax laws (under Section 115BBH of the Income Tax Act) clearly state:

 

A flat 30% tax (plus cess and surcharge) is applicable on all gains from transfer of cryptocurrencies.

 

No deductions are allowed except for the cost of acquisition.

 

Losses from crypto trades cannot be set off against any other income or carried forward to future years.

 

Many investors, however, mistakenly treat crypto profits like capital gains and try to reduce tax using indexation or expense claims — which the law explicitly disallows.

 

Set-off of losses from crypto investment or trading is not allowed to be set off against any other income or for carry forward to subsequent years.

 

Sources told PTI that data analytics done by the tax department has shown that a "significant" number of people have not filed the Schedule VDA (for crypto) in their ITRs, and such people were offering tax on the income earned at a lower rate or claiming cost indexation.

 

It is understood that the ITRs filed by taxpayers are being verified by the department with tax deducted at source (TDS) returns filed by various cryptocurrency exchanges (Virtual Asset Service Providers), and the defaulters may be selected for further "verification or scrutiny".

 

What should you do now? 

If you’ve received a communication from the Income Tax Department, don’t ignore it. The department is nudging you to file an updated ITR under Section 139(8A) of the I-T Act. This allows taxpayers to voluntarily correct or update their returns for a limited period — avoiding heavier penalties or scrutiny later.

 

Even if you haven’t received an alert but have unreported crypto income, it’s wise to update your return now. You can consult a tax expert or use online ITR filing platforms that offer VDA-specific filing tools. 

The current crypto-focused initiative follows two earlier NUDGE campaigns—one focused on the proper declaration of foreign income and assets, and the other on the withdrawal of bogus claims under Section 80GGC. With the rise in digital investments and the complexities of crypto taxation, the CBDT’s move signals a more data-driven, proactive, and transparent compliance environment. Taxpayers dealing in VDAs are now being reminded that transparency is no longer optional, and any oversight—intentional or not—could lead to serious scrutiny.

    With PTI inputs