Every assessment season, the Income Tax Department sends out thousands of notices to crypto traders. Some get flagged by automated AIS mismatch detection. Others get caught during scrutiny. And almost every time, it comes down to one of these ten mistakes.
I've seen all of these firsthand — from traders who genuinely didn't know the rules to experienced investors who got lazy with their filings. Here's the full list, with exactly what goes wrong and how to avoid it.
1. Not Reporting Crypto Income at All
This is still the most common mistake. A trader buys crypto, sells it for a profit, and simply doesn't mention it in their ITR. Maybe they think crypto is "not real" income. Maybe they assume small amounts don't matter.
The reality: your exchange reports your transactions via SFT (Statement of Financial Transactions). These show up in your AIS. The department's system automatically flags returns where AIS shows VDA transactions but the ITR doesn't. If you traded on any KYC-verified exchange — WazirX, CoinDCX, CoinSwitch, Binance (post-FIU) — they have your PAN and they've reported your data.
Fix: Report every single crypto transaction. Even if the gain was ₹500. The 30% tax on ₹500 is ₹150. A non-compliance penalty is far worse.
2. Offsetting Crypto Losses Against Gains
This is the second biggest trap. You made ₹3,00,000 on Bitcoin and lost ₹2,00,000 on altcoins. You report ₹1,00,000 as your taxable gain. That seems logical, but it's wrong under 115BBH.
Section 115BBH explicitly blocks loss set-off. Your taxable gain is ₹3,00,000, not ₹1,00,000. The ₹2,00,000 loss cannot reduce your tax liability — not this year, not ever.
Fix: Calculate taxable gains by summing up only your profitable transactions. Ignore the losses entirely for tax computation purposes.
3. Using the Wrong ITR Form
Crypto gains go under "Income from Virtual Digital Assets" in Schedule VDA. This schedule is available in ITR-2, ITR-3, and ITR-4. If you're a salaried individual with no business income, you need ITR-2 (not ITR-1, which doesn't have Schedule VDA).
Many salaried traders file ITR-1 out of habit and either skip crypto income or dump it under "Other Sources." Both approaches trigger mismatches.
Fix: If you have any crypto gains, file ITR-2 or ITR-3. Fill out Schedule VDA with transaction-level details.
4. Ignoring 1% TDS (Section 194S)
Every time you sell crypto on an Indian exchange, 1% TDS is deducted. This TDS shows up in your Form 26AS and AIS. When you file your ITR, you need to claim this TDS credit — otherwise you lose the refund.
Conversely, some traders see TDS was deducted and assume their tax obligation is complete. TDS is just advance tax collection — if your total tax on gains is ₹60,000 and only ₹8,000 was collected as TDS, you still owe ₹52,000.
Fix: Always check Form 26AS for TDS credits. Claim them in your ITR. Pay the remaining tax as self-assessment tax before filing.
5. Not Reporting P2P Transactions
A lot of traders use Binance P2P or WazirX P2P to convert between INR and USDT. They assume these trades are invisible because there's no traditional order book. But P2P platforms report this data, and bank transfers create a trail.
If you bought ₹5,00,000 worth of USDT via P2P during the year and didn't report any VDA income, that's a red flag the system will pick up.
Fix: Download your P2P trade history from the exchange. Include those transactions in your tax calculation. Every INR-to-crypto and crypto-to-INR P2P trade is a taxable event.
6. Missing Airdrops and Staking Rewards
Got free tokens from an airdrop? Earned staking rewards? These are taxable the moment you receive them. The fair market value on the date of receipt is treated as your income (taxable at your slab rate or at 30% — the exact treatment is still debated, but the income must be reported).
When you later sell those airdropped tokens, your cost basis is the fair market value at which you reported them as income. If you didn't report the airdrop as income, your cost basis is arguably zero — meaning 100% of the sale proceeds become taxable gain.
Fix: Track all airdrops, staking rewards, and token distributions. Report them as income in the year received. Use the FMV as your cost basis for future sales.
7. Using the Wrong Cost Basis
Your cost of acquisition is the only deduction allowed under 115BBH. If you get this wrong, your taxable gain is wrong — either too high (you overpay) or too low (you get a notice).
Common cost basis errors:
- Using average cost when FIFO should be used
- Ignoring transfer fees and gas fees (these are NOT part of cost of acquisition under 115BBH — only the purchase price counts)
- Using INR deposit amount instead of the actual purchase price of the specific token
- Not accounting for crypto-to-crypto swaps as separate transactions
Fix: Use FIFO (First In, First Out) method consistently. Your cost of acquisition is the purchase price including the buy-side exchange fee. Transfer gas and sell-side fees are not deductible.
8. Mixing Personal and Trading Wallets
If you move crypto between exchanges and wallets, you need to track that those are transfers — not sales. A transfer from WazirX to MetaMask is not a taxable event. But if your records don't show it clearly, it might look like you sold on WazirX and bought separately on MetaMask, creating phantom gains.
Fix: Label wallet transfers as transfers in your records. When you upload to CryptoITR, the tool will ask you to identify internal transfers so they're excluded from gain calculations.
9. AIS Mismatch — Not Cross-Checking Before Filing
Your AIS (Annual Information Statement) on the income tax portal shows all the data the department has about you — including crypto transactions reported by exchanges. If your ITR numbers don't match the AIS data, you'll almost certainly get a notice.
I've seen cases where the AIS shows ₹12,00,000 in total crypto sale proceeds, but the trader reported ₹4,00,000 in gains — because they only reported one exchange and forgot about the other. The system doesn't understand context; it just sees a mismatch.
Fix: Before filing, log in to the income tax portal and check your AIS. Compare the VDA transaction data with your calculations. If there's a mismatch, figure out why before filing — don't wait for a notice.
10. Ignoring Crypto Futures and Derivatives
Futures, perpetuals, and options on crypto are all taxable under 115BBH. Some traders assume futures aren't covered because there's no actual "transfer" of a VDA — but the CBDT has clarified that profits from crypto derivatives fall under VDA taxation.
If you trade USDT-margined perpetuals on Binance Futures and made ₹1,50,000 in realized PnL during the year, that ₹1,50,000 is taxable at 30%. The fact that you never "held" Bitcoin doesn't matter.
Fix: Download your futures P&L from the exchange. Include realized gains from futures and options in your Schedule VDA. CryptoITR can process futures data from Binance, CoinDCX, and other major exchanges.
What Happens When You Get a Notice?
If you've already made one of these mistakes, don't panic. If the deadline for revised returns hasn't passed, you can file a revised ITR correcting the errors. If a notice has already arrived, respond within the given timeframe with proper documentation.
The best move is to get your calculations right the first time. Upload your exchange files to CryptoITR, verify against your AIS, and file a clean return. A few hours of work now saves you months of back-and-forth with the tax department later.