A founder's guide to crypto tax: Managing digital assets without compliance risk

A few months ago, a friend running an early-stage startup called me and said something I’m used to hearing in our customer query review discussions. He had received an income tax notice, not about his company, but for a few crypto trades had made a couple of years earlier. The amount he owed the department turned out to be a number several multiples larger than what he expected, plus interest.

As a founder, you are trained to obsess over cap tables, runway and product-market fit. Personal financial hygiene naturally tends to take a backseat.

India's crypto tax framework, in place since 2022, is one of the simpler tax regimes in the Income Tax Act. Any gain from a Virtual Digital Asset (VDA) is taxed at a flat 30%, plus a 4% cess, under Section 115BBH, effectively 31.2%, applied regardless of income slab or how long the asset was held. There is no benefit for long-term holding, and the only deduction allowed is the original cost of acquisition.

Separately, Section 194S requires crypto platforms to deduct 1% Tax Deducted at Source (TDS) on qualifying transfers. This is the part that trips up most people, including sharp and otherwise financially literate founders. TDS is a collection mechanism, not a settlement of tax owed. It is adjusted against your final tax liability when you file.

The other feature of the crypto tax law that surprises people every year is that losses cannot be set off against gains, whether from crypto or any other source, and cannot be carried forward. Every transaction is taxed in isolation. A crypto portfolio can be down for the year overall and still generate a tax bill on the trades that were profitable.

Every crypto transaction above a threshold must be disclosed transaction-by-transaction under Schedule VDA in ITR-2 or ITR-3. But the gap between transactions and disclosures has been wide enough to draw Parliamentary attention. Tax department officials have noted that of the roughly 6.45 lakh individuals who had TDS deducted on crypto transactions in FY23, fewer than one in four, or about 1.39 lakh, actually declared that income in their returns.

Despite the scale, this gap is rarely deliberate evasion. It is far more often investors who assumed TDS covered them, or didn't know crypto needed its own disclosure schedule. The tax department, for its part, treats an honest, voluntary correction very differently from a mismatch it discovers on its own.

Section 139(8A) allows for an Updated Return (ITR-U) to correct past filings for up to four years, but the additional tax owed rises the longer you wait. From 25% of the tax and interest due if corrected quickly, going up to 70% if left for years. Waiting to be discovered can be the single most expensive decision available.

The best thing you can do is pull your Form 26AS and Annual Information Statement each year and reconcile them against your own trade history before you file, rather than after a tax notice arrives. If you find a gap from a previous year, correct it through ITR-U now. None of this requires becoming a tax expert. In my experience, the most resilient founders are the ones who fix a problem the moment they spot it, rather than wait for someone else to find out.

(Edul Patel is the Founder and CEO of Mudrex, a crypto trading platform)