Bitcoin investor faces ₹88.55 lakh tax addition despite ₹3.34 lakh loss; how an ITAT ruling helped the investor

A taxpayer who said he invested about ₹9.63 lakh in Bitcoin and incurred a loss of ₹3.34 lakh faced an income tax addition of ₹88.55 lakh after the tax department questioned the source of funds used for cryptocurrency transactions. The Income Tax Appellate Tribunal (ITAT), Lucknow Bench, has now quashed the reassessment, citing procedural lapses by the assessing officer.

The tribunal found that the tax officer did not give the taxpayer the minimum time required by law to respond to a notice and proceeded with reassessment without considering a reply that had already been submitted. The ruling does not establish that the taxpayer's explanation of his Bitcoin transactions was correct.

The order in Surya Pratap Singh Chauhan vs Income Tax Officer, ITA No. 642/LKW/2025, was pronounced on 13 February 2026 and relates to assessment year 2018-19.

How a Bitcoin investment led to an ₹88.55 lakh addition

According to the tribunal order, information received through the Income Tax Department's Insight Portal indicated that Chauhan had undertaken Bitcoin transactions worth ₹83.78 lakh during financial year 2017-18.

In his return filed in response to the reassessment notice, Chauhan reported a loss of ₹3.34 lakh from Bitcoin transactions. He disclosed an acquisition cost of ₹88.14 lakh and sale proceeds of ₹84.80 lakh.

The assessing officer treated ₹88.55 lakh as an unexplained investment under Section 69 of the Income-tax Act, 1961, arguing that Chauhan had not satisfactorily established the source of the funds used to purchase Bitcoin. The addition was upheld by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, in July 2025.

Chauhan argued that he had invested approximately ₹9.63 lakh of his own savings and money received as gifts from his grandmother. He said the higher purchase value reflected repeated buying and selling, with proceeds from earlier transactions being reused for subsequent purchases. He also relied on cryptocurrency exchange transaction statements and bank records to explain the movement of funds.

Why the tribunal quashed the reassessment

The ITAT's decision turned on the procedure followed by the tax officer.

On 25 March 2022, the officer issued a notice under Section 148A(b), asking Chauhan to explain why reassessment proceedings should not be initiated. The notice required a response by 31 March 2022.

Chauhan submitted his reply on 26 March. However, the officer passed an order under Section 148A(d) on 29 March, stating that no explanation had been furnished, and issued a reassessment notice on 30 March.

The tribunal noted that the applicable provisions required the taxpayer to receive at least seven days to respond, unless a different period was permitted under the law. The officer had proceeded before the response period expired and failed to consider the reply already filed.

The tribunal held that these procedural violations invalidated the reassessment proceedings. It therefore declared the reassessment void from the outset, without deciding the remaining grounds of appeal on their merits.

What cryptocurrency investors should know

The ruling does not mean that cryptocurrency purchases cannot be questioned by the tax department or that investors can automatically explain large transaction values by citing repeated trading. The tribunal did not conclusively determine whether Chauhan had established the source of the funds or whether the disputed addition was otherwise justified.

Investors should retain exchange statements, bank records, deposit and withdrawal details, and purchase and sale histories to establish how funds moved through their accounts. These records can help distinguish the original capital deployed from the cumulative value of repeated transactions.

The case also relates to financial year 2017-18, before the current special tax regime for virtual digital assets took effect. Section 115BBH, introduced from assessment year 2023-24, provides for a 30% tax on income from transfers of virtual digital assets, subject to applicable surcharge and cess, and restricts deductions and the set-off or carry-forward of losses.

The key takeaway is that a tax addition can be challenged when reassessment procedures are not followed, but the outcome does not remove an investor's responsibility to explain the source of cryptocurrency investments.