Didn't report your crypto earnings? Income tax dept sending tax notices, conducting search & seizure for undisclosed income; know your options
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Hardware based crypto wallets can be seized during a search operation
PIN, password, passphrase, and seed phrases.
Wallet names and addresses.
Unlike exchange-held crypto, hardware wallet holdings are not reported in 26AS or by intermediaries.
If these wallets held assets are not declared in returns, it could be treated as unaccounted income or unexplained investment under Section 69A.
If such wallets contained crypto obtained from foreign platforms or wallets (e.g., Binance, Metamask, etc.), Schedule FA disclosure becomes mandatory, and non-disclosure may attract penalty under the Black Money Act.
Source of investment, identity of parties involved, and mode of acquisition;
Proper classification (business income vs capital gains);
Disclosures made to RBI and tax authorities for foreign-held assets or cross-border dealings.'
The Income Tax department has sent bulk emails to numerous taxpayers who either haven't paid the correct income tax on their cryptocurrency dealings or have failed to report their cryptocurrency transactions in Schedule VDA virtual digital assets ) of the Income Tax Return ( ITR ). [1] Keep in mind that if you are using foreign crypto exchanges like Binance or others, then you need to file Schedule FA in addition to the VDA schedule in the ITR. Overlooking any of these requirements, could get you into trouble with the tax authorities.It's true that in the past similar bulk emails and notifications were sent out regarding unreported incomes, but this time things are different. The income tax department now has access to information and data about undisclosed crypto income even if the crypto transactions did not go through any Indian exchanges. Multiple experts told ET Wealth Online that their clients received this notice and in some instances, the tax department even conducted search and seizure operations and confiscated hardware-based crypto wallets.Just to give you some context, cryptocurrencies like Bitcoin (BTC), Ethereum (ETH), Solana (Sol) and others can either be stored in an crypto wallets provided by exchanges, or in hardware wallets like USB drives and floppy discs. Crypto wallets given by exchanges can be traced and tracked with some effort, but it's much harder to track hardware wallets since there is no information available even from the crypto exchanges where the transactions are taking place.Read on to know more about how the income tax department is cracking on both hardware and online crypto wallets for undisclosed crypto gains incomes.Ravi Sawana, Partner at Lakshmikumaran & Sridharan Attorneys, says: 'We have come across a few such notices. It appears to be a system e-mail which states that the transactions in crypto currencies on which tax has been deducted under Section 194S of the Income-tax Act, 1961, have not been declared in the income-tax return for FY 2023-24 (AY 2024-25). Therefore, this e-mail requires the taxpayers to update their income-tax returns and report transactions in crypto currencies.'Chartered Accountant Abhishek Soni, co-founder, Tax2Win, says: 'A few of our clients have received notices from the Income Tax Department regarding unreported crypto transactions. These notices are part of the department's recent campaign to identify and take action against individuals who failed to disclose income from virtual digital assets (VDAs) in their ITRs.'Priyanka Jain, partner, Vaish & Associates, says: 'In our case, directors of a company approached us when they got a tax notice for unreported crypto income and when their hardware based crypto wallet was seized by the tax department.'Jain shared a brief about what happened in her case. 'In our case, a search was conducted at the residential premises of the assessees and followed by a summons under Section 131(1) of the Income Tax Act, 1961, asking for detailed information related to crypto holdings, mining, transactions, wallet use, and disclosures made to tax and foreign authorities. The assessee responded with Income Tax Returns, bank statements and gains earned from gains from trading -offered under capital gains. Crucially, the assessee also submitted Zebpay and WazirX exchange statements for the period under search, reflecting a long trail of transactions. Despite these disclosures, the tax department remained unconvinced and further the department issued further follow-up notices. Also, the question with respect to discovery of crypto hardware wallet found during search were asked.'Soni says that the income tax department has used data from crypto exchanges and TDS (Tax Deducted at Source) returns. Once they got the data they analysed it and found mismatches between what taxpayers declared in their Income Tax Returns (ITRs) and the actual transaction data available.'This discrepancy has triggered alerts and emails to thousands of taxpayers for the financial years 2022–23 and 2023–24. In many cases, taxpayers were either unaware of the reporting requirements or mistakenly believed crypto earnings were beyond the tax net,' says Soni.Chartered Accountant (Dr.) Suresh Surana says many taxpayers have received this notice as this is part of the tax department's 'NUDGE' campaign. This NUDGE campaign is a step before the action is being taken. It's like the tax department has all the information they need to take action but is still giving you one more chance to come clean.Surana says: 'The Income Tax Department has recently issued notices to thousands of individuals as part of its 'NUDGE' campaign, which aims to encourage voluntary compliance through data-driven insights. These notices primarily target taxpayers who have failed to disclose or have under-reported income earned from crypto transactions. By leveraging data analytics, the department has identified discrepancies between the income reported in ITRs and the transaction data or TDS details provided by crypto exchanges.'In every virtual digital asset (VDA) or crypto transaction, if you have made any capital gains, you have to pay a flat tax rate of 30% and the only deduction you can take is for the cost of acquisition. Plus, any losses from these transactions can't be offset or carried forward.The reason the tax department sent out this notice is because they noticed many taxpayers either not reporting this income under Schedule VDA of their ITR or incorrectly claiming deductions, which led to these advisory notices being issued.Surana explains: 'Taxpayers who have received such notices should review their filed returns for the relevant years, gather complete transaction details, and, if necessary, file an updated return (ITR-U) under Section 139(8A) to correct any omissions. It is essential to pay the appropriate additional tax along with interest to avoid further scrutiny, penalties, or prosecution. Maintaining proper records such as TDS certificates, exchange statements, and transaction logs is also crucial for substantiating claims in case of any potential litigation.'Soni says in their client's cases, they have filed the ITR-U after mentioning the correct details of cryptocurrency transactions to ensure proper compliance and avoid any further consequences.Schedule VDA is a compliance schedule that every cryptocurrency user needs to fill even if they have not sold any crypto but bought and held one.Sawana from Lakshmikumaran & Sridharan Attorneys says: 'My advice would be to report such transactions in Schedule VDA to the income-tax return and claim the credit for taxes deducted at source. Non-reporting of such transactions may result in reopening of cases and penal consequences.'Soni says: 'For those involved in crypto trading or investments, it is essential to disclose all VDA income accurately in the ITR under the specific 'Schedule VDA' section. Even if the income is a loss, reporting it is mandatory.'Soni says: 'If crypto income was missed in past ITRs, one should consider filing an updated return under Section 139(8A) before the deadline. Responding promptly to any notice and maintaining detailed records of all transactions, wallet histories, exchange summaries, and TDS details is crucial to avoid penalties and scrutiny.'Jain says in her client's case, the most defining moment was the discovery of multiple hardware wallets during the search operation. These are private vaults controlled only by the user.Jain says that this seizureled to a series of questions seeking access to:Jain shares why this is critical:Jain explains: 'Even without active usage, mere possession of undisclosed crypto wallets becomes a basis to question wealth accumulation, source, and tax treatment. This case is a cautionary tale showing that taxability in cryptocurrencies arises from digital trails like TDS, exchange logs, and even physical hardware wallets.'Jain says: 'Even if income has been declared under presumptive taxation or as capital gains, the burden of proof lies on the assessee to show:Jain adds: 'And most importantly, mere possession or mention of a wallet if not accounted for, can create a strong presumption of taxable holding.'
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