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

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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.

Agarwal highlighted that often investors would have different usernames on crypto exchanges and use bank accounts with other names, this mismatch has also now created troubles for investors to produce proof of transactions.

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 2022, Indian government had imposed 30 percent tax on gains from virtual digital assets (VDAs) and a 1 percent TDS (tax deducted at source) on every transaction of Rs 10,000 and more.

Abhinav Jain, CFO, CoinDCX told Moneycontrol, “The notices majorly went to Binance P2P trade users. The cost of acquisition was not considered and users were given tax notices on the overall amount in the bank. Now the onus is on users to explain whether they have disclosed those tokens in their previous ITR filings.”

Responding to Moneycontrol’s queries a Binance spokesperson said, “As a registered reporting entity under India’s Anti-Money Laundering legislation, Binance reports suspicious transactions to the India FIU.  Binance is committed to complying with all applicable laws and regulations, including tax requirements.”

“Binance continuously monitors regulatory developments and works closely with legal and tax experts and believes that its positions are in accordance with applicable laws. Binance strives to ensure that it meets its obligations and provides the necessary support to its users for complying with their tax responsibilities,” the spokesperson said.

The spokesperson further explained that this issue is “not unique to Binance or its users”. So to enable smoother processing and access of the required information to the users, Binance is ensuring transaction history and other relevant data are readily available to for fulfilling their tax obligations.

“Users are responsible for accurately reporting their income, including gains from crypto transactions, in their tax filings. Users will receive prior notification if there are any changes to the operation of their account. For any queries on personal tax implications, users should contact their local tax consultant for advice,” the spokesperson added.

Another crypto tax startup TaxNodes had over 30 of its customers get notices from the IT officials. Founder Avinash Shekhar said, “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.

Also read: Budget Blow: Crypto traders may face 60% tax penalty for undisclosed income under the new proposed IT Act Provisions