Founder's Guide to India's Crypto Tax Compliance Gap
24 Jul 2026
India's crypto tax framework has been in place since 2022, but a stark data gap suggests many founders who've traded digital assets may be sitting on undisclosed compliance risk — and the cost of fixing it rises the longer they wait.
The numbers behind the gap
Under Section 115BBH, any gain from a Virtual Digital Asset (VDA) — the umbrella term India uses for crypto — is taxed at a flat 30%, plus a 4% cess, for an effective rate of 31.2%. Separately, Section 194S requires crypto platforms to deduct 1% Tax Deducted at Source (TDS) on qualifying transfers.
That TDS mechanism creates a data trail. In FY23, roughly 6.45 lakh individuals had TDS deducted on crypto transactions. But fewer than one in four of them — about 1.39 lakh — actually declared that income in their tax returns.
The report frames this gap as evidence of "significant under-reporting risk among crypto traders," a group that includes founders who traded crypto personally or through their ventures but never declared the income under the existing framework.
The cost of waiting
For founders who realize they've missed a filing, Section 139(8A) offers a four-year window to correct past returns through an Updated Return (ITR-U). But the cost of correction is time-sensitive: additional tax on a corrected filing starts at 25% of the tax and interest due if fixed quickly, and can climb as high as 70% if left for years.
In other words, the ITR-U window is an opportunity — but one with a shrinking payoff. Acting early likely reduces the additional tax burden; delaying likely increases it.
Why founders should care
- Founders who traded crypto without declaring the income face a real chance of falling into the same reporting gap that appears to affect a majority of TDS-flagged individuals — the data suggests under-reporting is common, not an edge case.
- The 1% TDS deduction means platforms are already reporting these transactions to tax authorities, so unreported income is plausibly already on record somewhere — it's a matter of when, not if, it surfaces.
- Using the ITR-U window sooner rather than later is likely to result in a materially lower additional tax bill (25% vs. up to 70%), making early correction a reasonably low-risk move for founders unsure of their filing history.
- Because VDA gains are taxed at a flat 31.2% regardless of holding period or structure, founders should probably not expect the same optimization levers available with other asset classes — tax planning here is more about compliance timing than rate reduction.
What's still unclear
The report leaves several open questions that founders should keep in mind. It's not clear what specifically explains the gap between TDS deductions and declared income — whether it's oversight, confusion about filing obligations, or deliberate non-disclosure. It's also unclear whether penalties beyond the additional ITR-U tax (such as prosecution risk) apply to non-disclosure, how the framework treats startups holding crypto on their balance sheets versus individuals trading personally, and what share of the 6.45 lakh flagged individuals are founders versus other investors.
The bottom line
India's crypto tax rules are straightforward on paper — 31.2% on gains, 1% TDS on transfers — but the compliance gap between TDS deductions and declared income points to a real exposure for founders who've traded digital assets without full disclosure. With the ITR-U correction window costing less the earlier it's used, founders with any uncertainty about past crypto filings likely have a narrowing incentive to act now rather than later.