A Guide to Filing Taxes on Crypto Earnings in India: Key Takeaways from Sarthak Ahuja
Filing Income Tax Returns (ITR) for cryptocurrency earnings in India is a complex process with strict rules. Investment banker and business educator Sarthak Ahuja has cautioned investors and traders about common mistakes that can lead to serious compliance issues. Here’s a summary of the key points to remember based on his advice and the established tax framework.
Understanding the Tax Rules for Virtual Digital Assets (VDAs)
The Indian government has a well-defined tax regime for VDAs like cryptocurrencies and NFTs, which was introduced to increase transparency in the market.
- Flat 30% Tax on Gains: Any profit from the transfer of VDAs—be it through selling, trading, or swapping—is subject to a flat tax rate of 30%, in addition to a 4% cess. This high rate applies to all gains, regardless of an investor’s income slab or whether the gain is short-term or long-term.
- No Set-Off for Losses: One of the most critical and unforgiving aspects of this tax framework is that losses from VDA trades cannot be set off against gains from other crypto assets or any other income source. Even if you have an overall net loss for the year, you must pay the 30% tax on all profitable trades.
- Losses Cannot be Carried Forward: Unlike with other assets, losses from VDAs cannot be carried forward to subsequent financial years to be adjusted against future gains. Every tax year is a clean slate in this regard.
- 1% Tax Deducted at Source (TDS): A 1% TDS is levied on the sale consideration of VDAs. This is a crucial government mechanism for tracking transactions. Indian crypto exchanges typically handle this deduction. However, for peer-to-peer (P2P) or international transactions, the buyer is responsible for deducting and depositing the TDS.
- Limited Deductions: The only expenditure that can be deducted from your taxable income is the cost of acquisition of the VDA. Expenses like exchange fees, brokerage charges, or other costs are not permitted as deductions.
Common Filing Mistakes to Avoid
Ahuja specifically highlighted several pitfalls that crypto investors must be aware of to prevent getting a notice from the Income Tax Department.
- Hiding Crypto Transactions: The government has access to transaction information from exchanges and through the TDS mechanism. Attempting to hide crypto transactions is a surefire way to invite a tax notice.
- Incorrect Income Classification: Your crypto earnings must be correctly classified. If you trade frequently, the income may be considered “business income,” requiring you to file ITR-3. If you hold crypto as an investment, it’s categorized as “capital gains,” and you should file ITR-2. Consult a tax advisor to determine the correct classification based on your trading frequency and volume.
- Applying Stock Market Rules: The tax laws for VDAs are distinct and do not follow the same rules as F&O (Futures & Options) trading in stocks. The calculation of turnover, gains, and set-offs is different, so copying traditional trading practices is a major mistake.
- Neglecting to Report Losses: While you cannot get any tax relief from crypto losses, they must still be properly reported. Failing to do so can trigger an audit.
New Reporting Requirements
Starting from FY 2025-26, the tax compliance for crypto has become even more stringent. A new Schedule VDA has been introduced, making it mandatory for all individuals and entities to disclose their gains from VDAs in their ITR.
The tax framework for VDAs in India is designed to be comprehensive and strict. Given that authorities are actively monitoring transactions through exchanges and TDS, accurate reporting and professional guidance are essential for all crypto investors to avoid penalties and regulatory scrutiny.