Crypto traders hit with hefty tax penalty as IT Dept cracks down on P2P transactions

Over the past few weeks, many crypto investors received income tax notices for non-payment of taxes on peer-to-peer (P2P) trades through foreign exchanges. A Binance spokesperson told Moneycontrol that the exchange has been closely monitoring and reporting suspicious trades to FIU-Ind.

Rakesh (name changed) had sold crypto tokens worth Rs 98,500 through peer-to-peer (P2P) transactions for about Rs 100,000 back in 2022, making a meagre profit of Rs 1,500 on this sale. He received the entire amount in his bank account and the transaction happened through a centralised exchange.

A few weeks ago, he received a notice from the income tax department flagging his Rs 100,000 deposit. On producing screen shots of the P2P trade and the statement generated by the exchange as a proof, the official asked him to pay 78% or Rs 78,000 in fine on a Rs 1,500 profit.

He is one of the 50 plus customers of crypto tax platform Koinx who got such IT notices over the past few weeks. Koinx founder Punit Agarwal shared that Rakesh was fined because his transaction was classified as an “unexplained cash credit” as per the new Income Tax Act amendments, that could impose 60 percent tax along with surcharges totalling to over 70 percent tax fine on undisclosed income.

“He was fined as he couldn’t share information about who the seller was apart from the chats with the seller and their profile screenshot registered on the exchange. The officer asked for specific KYC details like the PAN card of the P2P buyer, and Rakesh didn’t have this,” Agarwal said.

Most of these P2P transactions happened over foreign exchanges including Binance, and now defunct FTX among others, as they weren’t registered in India and weren’t liable to follow local anti-money laundering laws or monitor tax deductions.

While the investors earlier aimed to evade taxes through such methods, now they are in a limbo as exchanges like FTX has even shut down. The investors would be unable to track their trade records on it.

In fact, after Binance’s recent registration with the Financial Intelligence Unit—India, several crypto industry founders told Moneycontrol that the exchange may have shared the data on suspicious transactions with the authorities causing this action.

“In P2P transactions, the transactions are happening through bank accounts and the exchanges were not getting involved in deducting taxes directly. The customers in the P2P trade themselves had to do it.”

“Now if the customer on one side didn’t have the PAN or Aadhaar card of the other customer, the percentage of TDS also goes up to 5 percent and even 20 percent in some cases. Most Indian exchanges don’t allow P2P. Right now, only Binance allows P2P trades, but the money doesn’t go through them. It directly goes through between customer bank accounts, Binance only facilitates them,” Shekhar explained.