Crypto CARF-MA: What Goes Around, Gets Reported?

By bringing VDA under the ambit of tax enforcement and regulations, the government is not only acknowledging the growing significance of crypto but also reinforcing its commitment to transparency and accountability in financial transactions

India’s cryptocurrency landscape has witnessed a remarkable evolution over the past few years, transitioning from a phase of outright regulatory denial to structured taxation and compliance. The Reserve Bank of India’s (RBI) 2018 circular prohibiting virtual digital asset (“VDA”) transactions, which was subsequently overturned by the Supreme Court in 2020, was a turning point. By 2021, India emerged as the second largest market for cryptocurrency users globally, prompting the government to introduce a structured tax framework in 2022 under the Section 115BBH of the Indian Income-tax Act, 1961 (“IT Act”). This framework imposed a flat 30% tax on income from VDA transfers, along with additional surcharges and cess, marking the shift from prohibition to conditional acceptance. While the VDA taxation regime did not establish any specific reporting requirements, the Ministry of Finance notified certain activities, which if carried on by entities, would classify them as ‘virtual digital asset service providers’ (“VDASP”) that are ‘reporting entities’ under the Prevention of Money Laundering Act, 2002. Such VDASPs are, inter alia, obligated to register with the Financial Intelligence Unit of India (“FIU”), undertake customer due diligence, monitor transactions and submit reports of crypto transactions, etc.

With the surge in global discussions on the need for developing an effective framework for reporting crypto asset transaction and mitigating tax evasion risks vis-à-vis crypto assets, the Indian government has introduced various amendments to the IT Act to enable the tax authorities to monitor and address gaps in existing tax frameworks.

Weaving CARF into the IT Act

Globally, tax authorities were facing a challenge ensuring proper tax compliance with respect to crypto asset transaction, owing to lack of sufficient data to monitor such transaction. In order to bridge this gap, the Organisation for Economic Co-operation and Development (OECD) published Crypto Asset Reporting Framework (“CARF”), which is designed to foster the automatic exchange of information between countries, addressing the growing concerns over tax evasion risks linked to cryptocurrencies and digital assets. The importance of this initiative was underscored during the G20 Leaders’ New Delhi Declaration, which called for a swift and effective implementation of the CARF.

In alignment with this commitment, the Finance Act, 2025 (“Finance Act”) has introduced new compliance measures for “reporting entities” handling crypto transactions. While the definition of ‘reporting entities’, the nature and the manner in which these entities must maintain transaction records are yet to be prescribed by the Indian Government, these provisions are expected to be aimed at crypto exchanges and other intermediaries, as the framework is expected to draw significant guidance from CARF.

Such reporting entities will be required to collect, store, and report transaction data while conducting due diligence in line with government-prescribed norms. Additionally, they must register with a designated income-tax authority, reinforcing the regulatory framework. A notable shift in the introduced compliance regime is targeted to focus on crypto assets—digital assets utilizing blockchain or similar technologies for transaction validation and security rather than the broader category of VDAs, which also includes other cryptographically generated representations of value.

The government’s increased regulatory oversight signals a clear objective of enhancing transparency in crypto transactions and curbing tax evasion. However, considering that as on date, VDASPs are already required to monitor and report transactions under the PMLA, this new reporting framework raises concerns about potential operational burdens and reporting fatigue. If not harmonized with existing compliance structures, it could create a divergent reporting regime, significantly multiplying compliance burdens.

Unearthing digital dues

In order to enable the tax authorities to crackdown on notorious taxpayers, the Finance Act has introduced the inclusion of VDAs within the scope of ‘undisclosed income’ under Chapter XIV-B of the IT Act, which addresses special procedures for assessing search cases. This provision empowers tax authorities to conduct block assessments during searches, with any income determined through such an assessment subject to a steep 60% tax rate. The inclusion of VDAs under this regulatory framework represents a significant shift, potentially impacting crypto traders with undisclosed income from crypto transactions.

Interestingly, the Income-tax Bill, 2025 (“IT Bill”), which is set-to replace the existing IT Act with effect from April 1, 2026, has proposed to introduce the concept of a ‘virtual digital space’ within the ambit of search and seizure provisions. The IT Bill defines the term “virtual digital space” in a wide manner to, inter alia, encompass email servers, social media accounts, online trading platforms, cloud storage, and digital asset exchanges.

Under these provisions, the tax authorities have been expressly granted broad investigatory powers over a taxpayer’s ‘virtual digital space’, in cases of suspected tax evasion, which may include digital wallets, trading accounts maintained on exchanges, peer-to-peer platforms, stacking and earning platforms. Under the said provisions, the tax authorities are not only permitted to inspect or call for information pertaining to such virtual digital spaces, but even break open or override access controls to examine encrypted communications and digital holdings stored or maintained in virtual digital spaces. While these proposals are likely to intensify scrutiny on crypto traders, in the long run, this provision may encourage greater transparency within the crypto ecosystem and incentivize traders to conduct transactions through regulated platforms to ensure proper documentation.

Tax liens on crypto assets

Under the extant provisions of the IT Act, the tax authorities are empowered to declare a transfer of certain class of assets such as shares, immovable property etc void, if such transfer takes place during the pendency of any tax proceedings or outstanding demands against the seller. The IT Bill now proposes to explicitly include VDAs to the aforementioned class of assets. However, the said provisions would continue to not apply where such transfers are undertaken with the prior approval of a tax officer or where the transfer is for an adequate consideration, without the knowledge of pending proceedings or outstanding demands.

While this proposal may create operation burdens for the investors, it seems to be intended towards encouraging investor participation through regulated exchanges rather than untraceable peer-to-peer or over-the-counter transactions.

Conclusion

By bringing VDA under the ambit of tax enforcement and regulations, the government is not only acknowledging the growing significance of crypto but also reinforcing its commitment to transparency and accountability in financial transactions. However, with regulation comes the challenge of balancing oversight with innovation and growth. As the crypto ecosystem continues to evolve, it is crucial for the legal framework to remain flexible, ensuring that compliance requirements are clear and not unduly burdensome. A robust regulatory environment will help legitimize the crypto market, protect investors, and prevent misuse while aligning India with global efforts to regulate digital assets. In the long run, these measures reflect a necessary step toward integrating emerging financial technologies within the legal and tax framework of the country.

Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.