India’s tax department targets USDT arbitrage; loss offsets under Section 115BBH draw heat

What the I-T probe uncovered

India’s Income Tax Department has trained its sights on crypto traders who ran USDT arbitrage and then tried to trim their tax bills with offsets that the law does not allow. Investigators in Hyderabad found traders using automated bots to exploit tiny price gaps in Tether across exchanges. The strategy itself isn’t illegal. However, officials say many traders didn’t fully disclose profits and then attempted to net gains against losses. Notices are now being prepared.

If you bought USDT slightly cheaper on one exchange and sold it higher on another, that’s arbitrage. The profits still count as income from virtual digital assets. According to the department, some traders treated these earnings like regular business income and tried to wash them against other losses. That is where the problems start.

What the law says (and what it forbids)

Section 115BBH, introduced in the Finance Act, 2022, imposes a flat 30% tax on income from VDA transfers. It blocks all deductions except cost of acquisition. Most importantly, you cannot set off VDA losses against other income, and you cannot carry those losses forward.

The Central Board of Direct Taxes has also flagged a simple but costly mistake: skipping the new Schedule VDA in the income tax return. When that schedule is empty but the 1% TDS trail shows crypto activity, it triggers verification.

Enforcement is getting smarter—and fast

Beyond this arbitrage sweep, the I-T Department has leaned into data. It is matching returns with TDS filings from exchanges and running NUDGE campaigns to get taxpayers to fix mistakes. Parliament disclosures show authorities collected Rs 437 crore from VDA income in FY 2022–23. The department says it uses analytics and AI/ML tools to spot under-reporting. Penalties for misreporting under Section 270A can be steep.

Here’s how filers can stay compliant right now:

• Report every VDA transfer in Schedule VDA, even small arbitrage trades.
• Reconcile the 1% TDS deducted by exchanges with what you report.
• Claim only the acquisition cost; skip indexation and business-expense write-offs.
• Do not net gains against losses across coins or across income heads.
• Keep exchange statements and bot logs handy to substantiate trade trails.

Think of it like reconciling stock trades, but stricter. If your exchange deducted TDS on several USDT flips, make sure your return mirrors those entries. Otherwise, expect a nudge—or a notice.

Broader policy could still change. Earlier this year, Economic Affairs Secretary Ajay Seth said India is reassessing its crypto approach in light of global shifts. The tax regime, though, remains tough. Until policymakers redraw the map, enforcement on compliance will keep tightening.