Crypto Transactions and Income Tax Notices: How TaxBuddy Helps You Explain VDA Income
- Rashmita Choudhary
- 2 days ago
- 8 min read
Crypto transactions fall under strict tax rules, and income from Virtual Digital Assets must be reported accurately to avoid scrutiny. A flat 30 per cent tax applies to all profits under Section 115BBH, with no set-off or carry-forward of losses. Inaccurate reporting or skipped entries in Schedule VDA frequently trigger income tax notices, as the department matches AIS data with exchange reports and TDS deductions. Notices issued for AY 2023-24 and AY 2024-25 often arise from mismatches, unreported gains, or errors in selecting the correct ITR form. Platforms such as TaxBuddy simplify compliance through guided reporting and automated VDA checks.
Table of Contents
Understanding Crypto Transactions and Income Tax Notices
Crypto trading has moved into the mainstream, and with it comes a structured framework for taxation and compliance. Every sale, swap, gift, or transfer of a Virtual Digital Asset counts as a taxable event. The Income Tax Department tracks these activities through exchange-reported TDS under Section 194S, PAN-linked data trails, and third-party statements appearing in AIS. Notices are generally issued when reported income does not align with these datasets. Most notices highlight missing Schedule VDA entries, mismatch in TDS credit, or gains not declared under the correct income head. A timely and accurate explanation, supported by transaction logs and valuation details, ensures smooth resolution.
How VDA Income Is Taxed Under Section 115BBH
Section 115BBH imposes a fixed tax structure on gains from Virtual Digital Assets. Profits from transfers of cryptocurrencies and NFTs attract a flat 30 percent tax rate, irrespective of the holding period or the nature of the asset. No deductions are allowed beyond the cost of acquisition, and losses cannot be carried forward or adjusted against any other income. A one percent TDS applies on eligible transactions under Section 194S and becomes part of the verification process during filing. The uniform rate prevents classification disputes but increases the need for accurate gain computation for each individual transaction.
Why Crypto Transactions Trigger Income Tax Notices
Notices are triggered when the department identifies inconsistencies between taxpayer disclosures and data reported by exchanges or banks. Common triggers include undeclared VDA income, skipped entries in Schedule VDA, or incorrect ITR forms such as ITR-1 or ITR-4 being used despite crypto activity. AIS and Form 26AS often reflect 1 percent TDS under Section 194S, and failure to match these credits with declared gains leads to scrutiny. The rise in automated checks has increased notice frequency, especially for transactions executed between multiple platforms where consolidation errors occur.
How to Report VDA Income Correctly in ITR
VDA transactions must be recorded transaction-wise, using the correct ITR form based on activity. ITR-2 applies when VDAs are held as investments, while ITR-3 is required when trading resembles business activity. Schedule VDA captures asset type, date of purchase, date of transfer, cost of acquisition, sale value, and TDS deducted. Purchase and sale reports from exchanges help validate these entries. Gains must be computed individually, as aggregation risks misreporting. Accurate reporting ensures smooth processing since data from TDS returns, Form 26AS, and AIS is matched automatically by the department.
Responding to Crypto-Related Income Tax Notices
A notice response must explain the nature of the transactions, provide gain computations, and reconcile TDS credits with actual trading records. The department typically requests transaction statements, acquisition proofs, and valuation details for each transfer. In cases of under-reporting, a corrected ITR or an updated return under Section 139(8A) helps regularize discrepancies. Timely replies prevent escalation to penalty proceedings. Clarity, complete documentation, and consistent figures across AIS, ITR, and exchange reports form the foundation of an effective response.
How TaxBuddy Helps Explain VDA Income and Resolve Notices
TaxBuddy helps taxpayers handle VDA-related notices by offering a structured, end-to-end process that reduces confusion and improves accuracy in reporting. The platform begins by scanning AIS, Form 26AS, and exchange data to identify mismatches that commonly trigger scrutiny. This includes differences in TDS entries, discrepancies in sale values, or missing transaction details across platforms. By automating the interpretation of exchange statements, TaxBuddy converts raw reports into clear transaction logs that match the format expected in Schedule VDA. Each transfer is mapped with its acquisition cost, sale consideration, date of purchase, date of transfer, and asset classification, ensuring every detail aligns with the rules under Section 115BBH.
The system also reconciles the one percent TDS deducted by exchanges under Section 194S with the taxpayer’s Form 26AS, reducing the risk of underreporting or missing credits. When a notice is received, TaxBuddy prepares a structured explanation that presents the computation method, reconciled TDS values, and corrected VDA entries in a coherent format that meets departmental requirements. This reduces the chance of follow-up queries and speeds up the resolution process.
Expert review further enhances accuracy by validating classifications, checking transaction timelines, and verifying that the gains have been calculated correctly for each individual asset. The guided workflow helps taxpayers handle complex scenarios such as multiple exchange accounts, cross-platform transfers, international trades, or high-frequency activity. By breaking the process into simple steps and ensuring data integrity, TaxBuddy offers a dependable method for responding to crypto-related tax notices and maintaining consistent compliance in future filings.
Common Mistakes to Avoid When Reporting Crypto Income
Common mistakes in reporting crypto income often begin with selecting the wrong ITR form, which automatically leads to mismatches and triggers scrutiny. Taxpayers frequently choose ITR-1 or ITR-4, unaware that any involvement with Virtual Digital Assets requires filing through ITR-2 or ITR-3. Another recurring issue is combining all gains into a single figure instead of reporting each transaction separately. Since the tax law under Section 115BBH requires transaction-wise calculations, aggregation hides important details and results in inaccurate reporting.
TDS reconciliation is another area where errors occur. The one percent TDS deducted under Section 194S appears in AIS and Form 26AS, but many taxpayers fail to match this with their declared VDA income. This mismatch alerts the department that some transactions may not have been disclosed. International platforms, decentralised exchanges, and peer-to-peer trades add another layer of complexity. These are often not covered by Indian exchanges’ statements, and taxpayers forget to include them, creating gaps in disclosure.
The cost of acquisition also creates problems when taxpayers incorrectly add trading fees, network charges, or other expenses. Section 115BBH allows only the purchase cost as a deduction, and adding extra components inflates the cost, reducing taxable gains inaccurately. Using older statements, inconsistent valuation dates, or duplicate entries can distort the computation and raise questions during processing.
Accurate reporting depends on using the correct ITR form, calculating gains separately for each transaction, reconciling TDS properly, and ensuring that all trades across all platforms are included. Complete and consistent documentation significantly reduces the chances of receiving notices and helps maintain compliance throughout the assessment process.
Conclusion
Crypto taxation follows strict rules, and accurate reporting is essential to prevent notices triggered by mismatches or incomplete disclosures. The department’s verification systems rely heavily on AIS and TDS data, making it important to reconcile exchange-reported information with final returns. TaxBuddy simplifies this by offering automated checks, clear gain computation support, and expert guidance for navigating crypto-related queries. For anyone looking for assistance in tax filing, it is highly recommended to download the TaxBuddy mobile app for a simplified, secure, and hassle-free experience.
FAQs
Q1. Does TaxBuddy offer both self-filing and expert-assisted plans for ITR filing, or only expert-assisted options?
TaxBuddy provides two flexible filing pathways depending on the complexity of a taxpayer’s income. The self-filing system guides users through an AI-backed workflow that pre-fills details, checks for common errors, and highlights missing information, making it suitable for straightforward cases. For individuals dealing with crypto income, business activity, or multiple form requirements, the expert-assisted service ensures a qualified professional reviews documents, prepares the return, and verifies compliance with the latest rules. This combination allows users to choose the level of support needed without compromising accuracy.
Q2. Which is the best site to file ITR?
The Income Tax Department's e-filing portal remains the official platform for filing returns. However, many taxpayers prefer using structured platforms such as TaxBuddy for a smoother experience. These platforms provide automated validation, help reconcile AIS and TDS data, support complex schedules like Schedule VDA, and reduce manual input errors. For users managing crypto transactions or multiple income categories, such platforms offer additional clarity, expert oversight, and faster resolution of compliance issues.
Q3. Where to file an income tax return?
Income tax returns can be filed directly through the Income Tax Department’s e-filing portal or through authorized private platforms. TaxBuddy is one such platform that assists with preparing accurate ITR files, ensuring proper mapping of income categories, verification of tax credits, and inclusion of details required under schedules like VDA. Users can upload documents, verify data, and submit returns seamlessly, with guidance available for both simple and complex cases.
Q4. What triggers an income tax notice for crypto transactions?
Crypto-related notices typically originate from mismatches between disclosures in the ITR and the data captured in AIS or Form 26AS. Frequent triggers include unreported VDA transfers, skipped entries in Schedule VDA, incorrect calculation of gains, and TDS mismatches arising from Section 194Sdeductions. Notices may also be issued when taxpayers select an incorrect ITR form or underreport trading activity across multiple exchanges. These notices aim to correct discrepancies rather than penalize compliant behavior.
Q5. How should VDA gains be calculated for responding to a notice?
VDA gains are calculated by subtracting the cost of acquisition from the sale consideration for each transaction. Section 115BBH permits no deductions other than the acquisition cost, and expenses such as trading fees or platform charges cannot reduce taxable income. When responding to a notice, taxpayers must provide a transaction-wise computation, referencing date of purchase, date of sale, buy value, sell value, and proof of payment. Accurate calculations strengthen the clarity of the explanation submitted to the department.
Q6. Can TDS deducted by exchanges be claimed while explaining VDA income?
Yes, TDS deducted under Section 194S appears in AIS and Form 26AS and must be claimed while computing final tax liability. When responding to a notice, taxpayers should reconcile these deductions with their transaction records and highlight them in the explanation. Exchanges generally provide TDS certificates or statements that help validate the claim. This reconciliation forms a critical part of the notice response, especially when the department highlights mismatches.
Q7. Which ITR form must be used when VDA income is involved?
ITR-2 is appropriate for taxpayers treating VDAs as investments and reporting them under capital gains. ITR-3 is required when trading volume or frequency indicates business activity. ITR-1 and ITR-4 cannot be used if there is any crypto or NFT income. Notices often arise when taxpayers select the wrong form, so ensuring the correct ITR type is essential for preventing errors and reducing further scrutiny.
Q8. What documents are needed to respond to a crypto-related income tax notice?
A detailed reply should include transaction extracts from exchanges, cost of acquisition proofs, sale value statements, TDS certificates, and a consolidated gain computation sheet. In some cases, bank statements reflecting payments or receipts may also be required. These documents help the department verify that transactions have been reported correctly and reassures them that income has been classified and taxed as per Section 115BBH.
Q9. How can incorrect or missing VDA income be corrected after receiving a notice?
If errors are identified, the taxpayer can file a corrected return (revised ITR) or an Updated Return under Section 139(8A), depending on the assessment year and eligibility. The Updated Return allows correction even if the original filing deadline has passed, though additional tax applies. Correcting the return ensures that reported income aligns with exchange data and removes inconsistencies highlighted by the department.
Q10. Does ignoring a VDA-related notice lead to penalties?
Failure to respond can escalate the matter to penalty proceedings and may result in adjustments, interest, or prosecution in extreme cases. Notices are designed to provide an opportunity to clarify or correct the return, not to penalize immediately. Providing complete information, supported by verifiable records, resolves most cases without further action.
Q11. How does TaxBuddy help resolve VDA-related income tax notices?
TaxBuddy assists by interpreting the notice, identifying mismatches in AIS and Form 26AS, and reconstructing accurate gain computations from exchange statements. The platform prepares structured replies with transaction-wise details, TDS reconciliation, and supporting documents. Expert-assisted plans ensure that each notice is reviewed by a professional who understands VDA taxation rules, reducing the risk of follow-up queries or penalties.
Q12. Can TaxBuddy help with future compliance for crypto income to avoid notices?
Yes, TaxBuddy’s system checks for inconsistencies before the return is filed, ensuring Schedule VDA is completed accurately and TDS is matched with departmental records. Regular traders benefit from automated mapping of exchange statements and expert suggestions for compliant reporting. This reduces the likelihood of future notices and establishes a consistent record of accurate crypto tax disclosures.
