Crypto investors engaging in peer-to-peer (P2P) trades are now firmly on the radar of the Indian Income Tax Department. Over the past few weeks, several individuals have received tax notices demanding hefty penalties on transactions made through P2P platforms, especially those executed on foreign exchanges like Binance.
The Government has started tightening its grip on P2P crypto transactions, classifying many as unexplained cash credits due to a lack of proper KYC documentation or transaction clarity. Even minor profits have triggered disproportionately high tax demands, leaving many unsuspecting traders in shock.
This crackdown signals a clear shift in enforcement: unreported or poorly documented P2P crypto trades will no longer go unnoticed. If you’re an investor who uses foreign exchanges for P2P transactions, it’s crucial to understand what’s changing, why it matters, and what steps you must take to stay compliant.
Crypto Tax Rules for P2P Traders
India’s crypto tax laws have evolved significantly since 2022, leaving little room for ambiguity, especially regarding peer-to-peer (P2P) trading. Investors must now ensure that every P2P transaction is both well-documented and correctly reported to avoid severe penalties.
30% Flat Tax on Gains from Crypto Trades
Under the Income Tax Act, all gains from transferring virtual digital assets (VDAs), including cryptocurrencies, are taxed at a flat rate of 30%. This applies whether the transaction occurs through a centralised exchange or a P2P arrangement.
There are no exemptions or deductions allowed for expenses incurred other than the acquisition cost. This rule applies uniformly to both short-term and long-term holdings.
1% TDS on Transactions Above INR 10,000
The law also mandates a 1% tax Deduction at Source (TDS) on all crypto transactions exceeding INR 10,000. This applies even to P2P transactions, although enforcement becomes difficult when trades happen on foreign exchanges that do not comply with Indian tax rules.
In most P2P cases, deducting and depositing the TDS lies with the individual trader. Failing to do so can lead to additional tax liabilities and penalties.
Note: The buyer is responsible for deducting a 1% TDS and depositing it against the seller’s PAN Card.
Up to 78% Tax on Unexplained Cash Credits
Without proper KYC information or documentary proof, such as PAN cards, transaction details, and minimum KYC, the Income Tax Department may classify funds from P2P trades as unexplained cash credits under Section 68 of the Income Tax Act.
In such cases, the following rates may apply:
- 60% tax on the entire credited amount
- 25% surcharge
- 4% health and education cess
This can bring the total tax liability to over 78%, even if the actual gain from the trade was nominal.
Higher TDS Without PAN or Aadhaar
When the counterparty’s PAN or Aadhaar is unavailable, the TDS rate may go up to 5% or even 20% in some cases. These rates are applicable under Sections 206AA and 206AB, aimed at enforcing compliance through higher withholding.
What Triggered the Tax Notices?
As the Indian tax authorities step up enforcement efforts, P2P crypto traders have been scrutinised for nondisclosure and improper documentation. These tax notices are not random; they are a direct response to the gaps in how peer-to-peer trades are reported, especially when conducted on foreign exchanges without formal KYC protocols.
Let’s break down what triggered this wave of tax penalties.
Read More: Crypto Tax Evasion In India
Classification as Unexplained Cash Credits
In many recent cases, the Income Tax Department has classified funds received from P2P trades as “unexplained cash credits” under Section 68 of the Income Tax Act. This happens when traders fail to provide clear documentation about the counterparty involved in the transaction. Without verified details such as a PAN, Aadhaar, or minimum KYC and transaction details, authorities can treat the entire credited amount as suspicious income.
Missing KYC Information from Counterparties
The root issue lies in the lack of verifiable information about the buyer or seller involved in the P2P trade. On platforms like Binance, users often complete trades based only on profile details and chat screenshots. However, the tax authorities now require more: government-issued identification from the counterparty is fast becoming essential for validating such transactions.
Data Sharing by Foreign Exchanges
Now that foreign exchanges like Binance are registered with the Financial Intelligence Unit – India (FIU-IND). As part of its compliance obligations, Binance has started sharing trade information or flagging suspicious or large transactions with Indian authorities. As a result, many users who previously believed their trades were not under the radar now receive tax notices, some for transactions as old as 2022.
Real Cases: How Small Traders Are Getting Penalised
Here are some real-world scenarios that show how quickly things can go wrong if records are not in place.
The INR 1,500 Profit That Led to an INR 78,000 Penalty
A crypto investor named Ravi (name changed) sold crypto tokens worth INR 98,500 in 2022 through a P2P transaction on a centralised exchange. His profit? Just INR 1,500. However, the entire INR 1 lakh deposited into his bank account raised red flags with the Income Tax Department.
Despite showing screenshots of the transaction and exchange statements, Rakesh could not provide verified counterparty details. Since the transaction lacked full KYC compliance, the officer classified it as an unexplained credit. The result was a massive penalty of INR 78,000—over 50 times his actual gain.
Why Are These Penalties So Severe?
- Income misclassified: If an investor cannot justify the source or counterparty of funds, the entire amount is treated as undisclosed income.
- Tax slab applied: A flat 60% tax is levied under Section 115BBE, along with a surcharge and cess, pushing the effective tax rate beyond 78%.
- Documentation gaps: Proof like chat logs or profile screenshots on an exchange is not considered valid by tax authorities.
Other Reported Cases
Crypto tax platforms like KoinX and TaxNodes have reported dozens of similar incidents. Over 80 platform users received notices, mostly involved in P2P trades through foreign exchanges such as Binance and FTX.
Many users are now struggling to produce previous trade data, especially in cases where the exchange (like FTX) is no longer operational. This has left investors exposed to penalties with little recourse for proving their original cost of acquisition or the legitimacy of the transaction.
Read More: Everything About ITR-U
What Should Investors Do Now?
As taxation scrutiny on P2P crypto trades intensifies, investors must proactively remain compliant and avoid unnecessary penalties. Whether you trade frequently or occasionally, maintaining transparency and accurate records is now non-negotiable.
Maintain Clear Documentation for Every Trade
For each P2P transaction, ensure you keep:
- Screenshots of the trade details from the exchange
- Bank statements reflecting the credited or debited amount
- Chat logs (if applicable) from the exchange interface
- Most importantly, KYC details of the counterparty, including PAN or Aadhaar, where possible
The absence of this information could lead to classification as unexplained income, attracting higher taxes and scrutiny.
Avoid P2P Trading on Non-Compliant Platforms
While foreign exchanges may offer convenience, they may not follow Indian KYC norms or deduct TDS on your behalf. This places the entire compliance burden on the investor. If the platform is not registered with Indian authorities, it increases the risk of transaction data being flagged or inaccessible during audits.
To trade more securely, consider reading our blog on the 10 Best P2P Trading Platforms to explore safer and compliant alternatives.
Use KoinX Be Compliant Avoid Penalities
To simplify tracking and compliance, investors can use platforms like KoinX, which help consolidate and analyse all crypto transactions across P2P, centralised, and decentralised platforms. With KoinX, you can:
- Import trades from major exchanges
- Automatically calculate gains, losses, and applicable taxes
- Generate tax-ready reports for ITR filing
- Get alerts on missing KYC or TDS obligations
For those new to peer-to-peer trading, our guide on How to Prevent P2P Scams covers essential risk management tips.
Read More: Which Tax Form To File In FY 2024-25
Conclusion
The recent wave of tax notices marks a turning point for crypto investors in India, particularly those relying on peer-to-peer trades via foreign platforms. With the Income Tax Department actively flagging unverified transactions and demanding documentation, the risks of informal or undocumented trading are higher than ever. What was once seen as a workaround to avoid taxes now has severe financial and legal consequences.
To stay ahead of regulatory changes, investors must prioritise transparency, maintain proper records, and trade through compliant channels. Using tools like KoinX can make it easier to manage your crypto portfolio, calculate your tax obligations, and file accurate returns.
