CBDT Joins RBI in Warning About Crypto Tax Risks, Highlights Enforcement Gaps

Tax Authorities Sound Alarm on Cryptocurrency Risks

The Central Board of Direct Taxes has issued a strong warning about virtual digital assets. This move aligns the tax department directly with the Reserve Bank of India's cautious position. Both regulatory bodies now share growing concerns about how cryptocurrencies fit within India's financial system.

Parliamentary Committee Receives Stern Warning

CBDT recently presented its concerns to a Parliamentary Standing Committee on Finance. The presentation underscored serious regulatory skepticism. Officials highlighted multiple risks that cryptocurrencies pose to India's taxation framework.

Key issues include potential revenue losses and significant enforcement gaps. The department also warned about possible misuse for tax evasion and illicit financing activities.

Major Challenges in Tracking Crypto Transactions

Tax authorities face several specific difficulties:

Cryptocurrencies enable anonymous, borderless transfers that occur almost instantly. This makes tracking taxable income extremely challenging.
Identifying beneficial ownership becomes problematic with these digital assets.
Offshore exchanges and private wallets complicate enforcement efforts.
Decentralized platforms obscure transaction trails, hindering accurate tax assessment.
Jurisdictional limitations create additional obstacles since many transactions occur outside India's regulatory reach.

Officials described compliance and enforcement as "virtually impossible" in many cross-border crypto scenarios.

India's Stringent Tax Framework for Digital Assets

India has implemented one of the world's strictest tax regimes for virtual digital assets. The Finance Act of 2022 introduced specialized provisions through Section 115-BBH of the Income-tax Act.

This regime includes several tough measures:

Income from transferring VDAs faces a flat 30% tax rate plus surcharge and cess.
The tax applies regardless of the holding period, treating all gains equally.
Only the cost of acquisition qualifies as a deduction - transaction fees and exchange charges cannot be claimed.
Losses from VDAs cannot be set off against other income or even against gains from different crypto assets.
Losses cannot be carried forward to future years.
A parallel provision mandates 1% tax deduction at source on transfers exceeding specified thresholds.

For example, a salaried individual must pay 1% TDS when transferring VDAs worth more than ₹10,000.

Industry Concerns About Current Tax Structure

Various industry associations have raised objections in their pre-budget submissions. They argue that disallowing loss set-off between VDAs creates economic distortion. Many believe this approach ultimately reduces tax revenues rather than increasing them.

The core argument is straightforward. When losses remain ring-fenced but gains face full taxation, risk-taking receives asymmetric punishment. This imbalance has reportedly driven trading volumes offshore.

Several exchanges have shifted operations overseas in response. Indian investors increasingly use cross-border structures that raise Foreign Exchange Management Act complications. The result treats crypto trading more harshly than equities, real estate, or even speculative assets.

Unresolved Questions About Non-Resident Taxation

Section 115-BBH applies equally to residents and non-residents. However, crucial uncertainties remain about where virtual digital assets are located for tax purposes.

For non-residents, taxability depends on whether income accrues or arises in India. This determination involves Sections 5 and 9 of the Income-tax Act along with relevant tax treaty provisions.

Unlike shares or immovable property, VDAs lack clearly identifiable physical or legal locations. Without legislative clarity on crypto asset situs, non-resident taxation risks becoming dispute-prone.

Particular complications arise when trading occurs on global exchanges, assets sit in offshore wallets, and sale proceeds remain outside India. Experts emphasize that clarity is essential to prevent unnecessary litigation.

Some jurisdictions like the United Kingdom offer guidance by linking crypto asset situs to the beneficial owner's residential status. India could potentially adapt similar approaches.

Reporting Requirements for Crypto Investors

Individuals dealing in cryptocurrencies must disclose VDA income in Schedule VDA of their annual tax returns. Most taxpayers use ITR-2 or ITR-3 forms depending on their income profiles.

The schedule requires detailed information including:

Date of acquisition and transfer
Cost of acquisition
Sale consideration amount

Accurate reporting proves crucial since under-reporting or misreporting VDA income can trigger penalties. Taxpayers may also face interest charges on unpaid tax amounts.