You lost money in F&O trades this year. (So no taxes, right?) Wrong. Welcome to India’s most misunderstood financial trap: (Futures & Options taxation.) Thousands of new traders enter the F&O market every month, hoping for fast profits. But by the time tax season arrives, many don’t even know they were supposed to report anything. And that silence could trigger something worse than a red P&L: An income tax notice. Let’s break down the F&O tax bomb: ✅ F&O income is classified as “business income,” not capital gains. You must report it using ITR-3, not ITR-1 or ITR-2. ✅ Your total turnover includes both profit and loss legs, not just net P&L. ✅ Audit becomes mandatory if: - Your F&O turnover exceeds ₹10 crore (with digital transactions), or - Your declared profit is less than 6% of turnover, and you’re not opting for presumptive taxation under Section 44AD ✅ If you incur losses and want to carry them forward, you must file ITR-3 on or before the due date (typically July 31) and maintain proper books of accounts — or those losses can’t be carried forward. ✅ If you skip the audit (when required), your return can be invalid, and your losses? Gone for tax purposes. 🔍 Why this matters in 2025: The Income Tax Department now cross-verifies broker reports, UPI transactions, and trading patterns to detect a mismatch between your trades and filed returns. Even if you made a loss, if you didn’t report it correctly, you may face: ⚠️ Scrutiny notices ⚠️ Penalties ⚠️ Disqualification of loss set-off ⚠️ Questions about undisclosed income 📉 Why is this dangerous? - 90% of retail F&O traders don’t even file ITR-3 - Many CAs don’t know how to compute F&O turnover - Finfluencers talk about strategy, never about tax rules 💡 What should you do right now? - Calculate F&O turnover using correct method (profit + loss legs) - Choose ITR-3, not ITR-1 or 2 - Check if the audit applies, especially if you declared low profit or high turnover - File before the deadline, or else you lose the right to carry forward losses - Maintain books of accounts, even if you’re only trading part-time This isn’t tax advice. It’s a wake-up call. In trading, losing money is painful. But ignoring tax rules can cost you even more, and stay with you longer. Because SEBI is watching. And now, so is the Income Tax Department.