India’s cryptocurrency tax regime is among the strictest in the world, with severe penalties for non-compliance especially in peer-to-peer (P2P) trading. Many traders unknowingly fall into tax traps, leading to 30% tax demands, 78% penalties, and even criminal prosecution.
This guide explains the biggest tax risks in P2P crypto trading and how to stay compliant while avoiding audits and penalties.
1. Why Is P2P Trading Under the Scanner in 2025?
Since 2022, India introduced two major laws:
- 30% tax on all crypto profits (no deductions allowed)
- 1% TDS (Tax Deducted at Source) on crypto trades over ₹50,000 per year (₹10,000 in some cases)
- No loss offset—crypto losses cannot be set off against gains.
If you’re using an Indian exchange (like CoinDCX), these are auto-deducted. But in foreign platforms like Binance or P2P buyers must manually deduct 1% TDS and file Form 26QE (individuals) or 26Q (businesses).
Why it matters: If you don’t do this, the Income Tax Department might classify your entire trade amount as “unexplained income” and slap a 78% tax penalty on you.
What is TDS in Crypto?
TDS stands for Tax Deducted at Source. It’s a small amount (1%) that the buyer must cut from the total and deposit with the government.
Example: If you’re buying ₹1,00,000 worth of crypto P2P, you only pay the seller ₹99,000 and deposit ₹1,000 via the ITD portal.
It’s not extra tax — you can claim it while filing your return.
What Happens If You Skip TDS in P2P?
Scenario:
You bought ₹1 lakh worth of crypto via Binance P2P. You should have:
- Deducted ₹1,000 (1% TDS)
- Paid ₹99,000 to the seller
- Filed Form 26QE (individuals) or Form 26Q (businesses)
Missed it? Here’s what happens:
- “You owe that ₹1,000 again” – as a penalty under Section 271C
- “You may face jail (3 months to 7 years)” – under Section 276B
And yes, even small, round transactions (like ₹50,000 or ₹1,00,000) raise red flags.
Real Case:
In 2022, a trader made a ₹1,500 profit on a ₹98,500 P2P sale. In 2025, he received a ₹78,000 tax penalty because he couldn’t provide buyer KYC.
2. Bank Deposit Mismatches
The Income Tax Department (ITD) cross-checks bank statements with crypto transactions. If you receive large deposits without proper documentation, they may classify funds as:
Unexplained Cash Credits (Section 68) – Entire amount taxed at 60% + 25% penalty = 78% total penalty (Budget 2025 rule).
Red Flags for Tax Authorities:
- Transfers to/from unknown wallets (no KYC proof).
- Frequent P2P deposits without TDS records.
- Round-figure transactions (e.g., ₹50,000, ₹1,00,000).
Fix It:
- Match every crypto deal to a bank entry
- Maintain UTR numbers, screenshots, chat logs
- Keep PAN or Aadhaar of the counterparty
Do I Really Need the Seller’s PAN?
Yes. If you don’t collect it, TDS rules say you must deduct 5% or even 20% — not 1%.
What if I didn’t collect PAN?
- Try to contact the counterparty (via Binance chat logs, Telegram, etc.)
- If you can’t get PAN, explain this in your ITR notice response
- Show proof you tried: chat history, screenshots
The ITD may waive penalties if they see you acted in good faith.
3. Foreign Exchange Risks: Binance, KuCoin & Offshore P2P
Many traders use Binance, KuCoin, or other foreign exchanges to bypass TDS. But now:
- FIU-IND (Financial Intelligence Unit) tracks offshore trades.
- Exchanges report large transactions to Indian authorities.
- FEMA violations possible if moving funds abroad.
Tax Risks in Offshore P2P:
- No TDS deduction? Penalty = 100% of TDS amount.
- No PAN/Aadhaar of counterparty? TDS rate jumps to 5-20% (Sections 206AA & 206AB).
- Crypto-to-crypto swaps? Both parties must deduct 1% TDS each.
4. How to Avoid Penalties: Compliance Checklist
Do This:
- Deduct & Deposit 1% TDS for every P2P trade > ₹50,000.
- Keep Records of:
- Counterparty PAN/Aadhaar (mandatory for audit-proofing).
- Bank UTRs, chat logs, transaction hashes.
- File ITR with Schedule VDA (report all crypto gains).
- Reconcile bank statements—ensure deposits match reported trades.
Avoid This:
- Using foreign exchanges without TDS compliance.
- Ignoring small P2P trades (they add up over ₹50,000/year).
- Mixing personal & crypto funds (creates audit risk).
What You Should Do (Beginner-Friendly Checklist)
1. Gather Your Records
- Download trade history from Binance/CoinDCX
- Match with bank entries
- Collect PAN/Aadhaar of P2P counterparties
2. Fix TDS Mistakes
- File Form 26QE or 26Q ASAP
- Use Challan 281 to deposit missed TDS
3. Update Your Tax Filing
- Use Schedule VDA in your ITR
- Include all crypto gains/losses (even small P2P trades)
4. Don’t Mix Personal & Crypto Money
- Use a separate bank account for crypto
- Avoid transferring round figures like ₹1,00,000—these stand out
5. Use Tax Software or a CA
- Koinly, ClearTax, or a crypto-knowledgeable CA can help
Got a Tax Notice? Here’s What to Do
Stay calm. Thousands of Indian users are now getting notices for P2P trades from as far back as 2022. Here’s how to respond:
- Print/export all trade data and bank entries
- Prepare an explanation letter: Be honest about the trade, counterparty, and missing TDS
- File late TDS and update your ITR if needed
- Submit everything via the Income Tax e-portal or through your CA
Tip: The sooner you respond, the lower the risk of a harsh penalty.
Not Sure What to Do? Use This Flow:
| Scenario | What to Do |
|---|---|
| You traded on Binance P2P and didn’t file TDS | File Form 26QE now, and match transactions with bank entries |
| You got a notice from the ITD | Respond with trade proof, file late TDS, and amend ITR |
| You didn’t collect PAN from a seller | Explain it, show proof of effort, and consult a crypto CA |
| You only did a few trades under ₹50K | Still report it — trades add up fast |
Don’t Forget: Airdrops and Gifts Are Taxed Too
- Airdrops: Taxed as income when received, then 30% capital gains when sold
- Gifts > ₹50,000 from non-family: Fully taxable as income
Keep records of:
- Token value on day of receipt
- Transaction proof (screenshots, airdrop logs)
Final Thoughts: Don’t Let Ignorance Cost You 78%
The new crypto tax regime in India doesn’t spare mistakes:
- P2P with no TDS = 78% penalty
- Foreign wallets = red flag
- Crypto-to-crypto = taxed same as INR trades
But here’s the good news: You can fix past mistakes. File belated TDS. Respond to notices. Work with a CA.
“Traders who act now save lakhs. Those who ignore, risk losing everything.”
Deadlines to Remember
- July 31, 2025: Regular ITR deadline
- Dec 31, 2025: Last date for belated returns
- Visit incometax.gov.in to file TDS
- Use Koinly or ClearTax
- Find a CA who understands crypto tax filing
Stay compliant, trade safely, and avoid the tax trap!
