Profits earned through digital asset trading are now firmly on the radar of Indian tax authorities, signaling a new era of stringent oversight. With enhanced data-sharing mechanisms actively in place between digital asset exchanges and the government, tax officials are capable of monitoring and cross-referencing digital asset transactions in real-time. This intensified scrutiny has already led to significant enforcement actions, including substantial seizures and official notices sent to thousands of individuals. The crackdown reflects India’s determined effort to bring the burgeoning crypto sector under its comprehensive regulatory and taxation framework.
Tax Authorities Target Crypto Evaders
India’s Income Tax Department has reportedly contacted thousands of individuals who engaged in digital asset-related activities but failed to include this income in their tax filings. These individuals, covering the financial years 2022–23 and 2023–24, have received official notices urging them to promptly update their Income Tax Returns (ITRs) and rectify any omissions or inaccuracies. This comprehensive outreach highlights the government’s serious intent to enforce compliance within the digital asset space, ensuring all generated income is properly declared and taxed.
Concerns Over Tax Evasion and Illicit Flows
Authorities, including the Central Board of Direct Taxes (CBDT), are reportedly deeply concerned about potential tax evasion and illicit financial flows within the crypto market. They have specifically flagged a segment of “high-risk” investors suspected of channeling undisclosed income into virtual digital assets (VDAs). This crackdown stems from significant discrepancies found between taxpayers’ reported information and data obtained directly from digital asset platforms, as well as Tax Deducted at Source (TDS) returns.
Discrepancies Trigger Red Flags
The heightened scrutiny is a direct result of inconsistencies between reported figures and actual transaction volumes and values. In numerous instances, the data did not align, raising serious red flags over the underreporting or outright non-disclosure of income generated from digital asset trading. These discrepancies have prompted a swift and decisive response from tax officials, aiming to close potential loopholes for financial misconduct.
Strict Taxation Landscape in India
India imposes one of the harshest taxation regimes on digital asset trading globally. A flat 30% tax is levied on all digital currency income, with no provision to offset losses, making it particularly challenging for traders. Furthermore, a 1% Tax Deducted at Source (TDS) is applied to all transactions exceeding Rs 10,000 ($116), significantly impacting trading volume. This stringent approach, according to a study from Esya Centre, an Indian policy think tank, may lead to a substantial loss of about $1.2 trillion in trade volume on domestic exchanges.
Exchanges Navigate Regulatory Hurdles
The demanding regulatory environment has already led to significant shifts in the Indian crypto ecosystem. Seychelles-headquartered OKX exchange, for instance, shut down its India operations in 2024, citing insurmountable regulatory hurdles. Conversely, domestic exchanges have been increasingly complying with new regulatory demands, adapting their operations to meet the government’s stringent requirements. This dual response highlights the divergent paths crypto entities are taking in response to India’s evolving stance.
Industry Calls for a Level Playing Field
Despite increased compliance, domestic exchanges have actively requested the government to establish a more level playing field for virtual digital assets (VDAs). Key demands include reducing the TDS from 1% to a more manageable 0.01%, allowing the offsetting and carrying forward of losses, and treating income from digital assets on par with other capital assets. However, these requests have largely fallen on deaf ears, with Finance Minister Nirmala Sitharaman reiterating in March 2024 that ‘cryptocurrencies’ cannot be considered legal currency in India.
Mandatory Reporting for All VDA Income
Sumit Gupta, co-founder of CoinDCX, India’s first digital currency unicorn, has underscored the mandatory nature of VDA income reporting for all Indian users. He stressed that regardless of how one interacts with crypto – be it through global exchanges, P2P wallets, or airdrops – all VDA income must be reported. Gupta’s message is clear: “Crypto is here to stay, but so are the rules…Paying your taxes is not optional. It is essential for building a sustainable and legitimate crypto ecosystem in India…Stay informed. Stay compliant. Let’s make crypto a responsible asset class together.”
CBI Busts Cyber Fraud Ring, Seizes Crypto
In a separate but related development, India’s Central Bureau of Investigation (CBI) successfully dismantled a cross-border cyber fraud ring, leading to the arrest of an Indian resident and the confiscation of over $327,000 in ‘cryptocurrency’. This operation, which targeted individuals in the United States and Canada, represents a significant stride in the agency’s crackdown on digital crime with international reach. The CBI’s actions demonstrate its growing expertise in handling complex cybercrime investigations involving digital assets.
Enhanced CBI Capabilities and Enforcement
The CBI’s investigation uncovered incriminating evidence, including tools for making international calls with masked caller identity and lead-generation mechanisms based on social engineering tactics. The suspect, Rahul Arora, was arrested during coordinated raids, revealing advanced software and equipment allegedly used to impersonate government officials and technical support. The CBI highlighted its developed in-house capabilities for handling and seizing VDAs, implementing necessary systems for asset management as per legal provisions. This enhanced capability underscores the agency’s increasing focus on crimes involving digital assets, bolstered by experience from major cases like the GainBitcoin Ponzi scheme.
Redefining India’s Crypto Ecosystem
Raj Kapoor, founder and CEO of India Blockchain Alliance, articulates a clear message for the Indian crypto ecosystem: “the era of regulatory leniency is over, and this isn’t necessarily bad.” He emphasizes that stringent clarity is preferable to confusion, as it allows serious players to innovate and investors to enter with confidence. Kapoor warns that failure to proactively adopt industry standards or engage constructively with regulators may lead to more exchange exits and a chilling effect on Web3 startups, potentially pushing them to domicile overseas.
