Recent data analytics have shown that numerous individuals failed to file Schedule VDA of their ITRs, with some reporting income at lower tax rates or improperly claiming cost indexation.

The investigation is particularly focused on individuals and entities engaged in high-risk Virtual Digital Asset (VDA) transactions who may have violated the Income Tax Act of 1961 by not disclosing their digital asset income or filing incorrect tax returns.

In a bid to enhance taxpayer compliance, the CBDT has launched its third NUDGE campaign in six months, part of its 'TRUST - Taxpayers First' initiative.

The NUDGE campaign, which stands for Non-intrusive Usage of Data to Guide and Enable, aims to assist taxpayers in adhering to tax regulations.

The current focus of the CBDT's scrutiny includes discrepancies in crypto-related disclosures for Assessment Years 2023-24 and 2024-25.

Taxpayers who do not respond to the CBDT's nudge may face selection for further verification or scrutiny by the tax department.

The law explicitly restricts expense deductions to the cost of acquisition of VDAs, prohibiting any set-off or carry-forward of losses from VDA transactions.

The Central Board of Direct Taxes (CBDT) is actively cross-referencing Income Tax Returns (ITRs) with Tax Deducted at Source (TDS) returns from Virtual Asset Service Providers (VASPs) to identify potential tax defaulters.

According to Section 115BBH of the Income Tax Act, 1961, income from the transfer of VDAs is taxed at a flat rate of 30%, with only the cost of acquisition allowed as a deduction.

It is important to note that losses from VDA investments cannot be offset against other income or carried forward to future years, which complicates tax implications for investors.