Indian Crypto Traders Using Binance Face Tax Heat Over TDS Compliance
The Indian Income Tax Department has intensified its scrutiny of domestic crypto traders using Binance, raising questions about non-compliance with the mandated 1% TDS on digital asset transactions. Notices have been issued, asking individuals to either prove the TDS has been deducted or justify its exemption.
- Authorities are especially interested in those using offshore platforms, where TDS compliance may be bypassed.
- Traders have also been asked to submit income tax returns from relevant years to verify the origin of funds used in crypto investments.
Source of Funds and Unexpected Tax Implications
Several notices have gone beyond just TDS, with tax officials examining transaction histories and in some cases, imposing a flat 30% tax on the entire turnover instead of taxing just the profits.
- This method has raised concerns as it ignores gains-based taxation and could result in disproportionately high tax burdens.
- Traders moving funds from Indian exchanges to foreign wallets are under increased watch, especially if they became NRIs or relocated abroad.
Regulatory Grey Area Around Foreign Exchanges
The issue largely stems from the fact that foreign crypto exchanges like Binance do not withhold TDS, unlike Indian platforms which directly deduct it at the time of transaction.
- Most of these transactions are peer-to-peer (P2P), where the buyer and seller settle trades in Indian rupees outside the exchange’s official payment system.
- In such cases, the buyer is responsible for TDS deduction, but compliance is often ignored or misunderstood, either intentionally or otherwise.
Crypto Swaps and Anonymity Fueling Regulatory Concerns
Complications arise when traders swap one crypto for another, a common practice on overseas platforms. According to Indian tax laws, such transactions trigger TDS obligations for both parties involved.
- Traders withdrawing assets from Indian exchanges can move funds to private wallets, potentially enabling untraceable swaps or illegal transfers.
- Exchanges have thus tightened withdrawal norms to combat money laundering and prevent circumvention of financial laws.
Expert Warnings and Compliance Challenges
Vikram Subburaj, CEO of Giottus, emphasized that serving Indian investors comes with a responsibility to follow local laws, even for offshore exchanges. He noted that these platforms shift the burden of compliance entirely onto investors.
- Tax consultant Ashish Karundia pointed out that Virtual Digital Asset (VDA) transactions between Indian and foreign wallets can violate foreign exchange laws and AML norms.
- He urged the government to issue clearer guidelines that define suspicious patterns such as high-frequency trading or use of obscure coins.
Rise of Privacy Coins and Difficulties in Tracking
Once traders gain access to privacy-focused coins like Monero or Zcash, the trail goes cold. These assets are specifically designed to hide transaction histories, making them invisible to blockchain surveillance tools used by regulators.
- Unlike Bitcoin or Ethereum, which maintain public ledgers, these coins can be moved and sold without any visible footprint.
- This capability, though appealing to privacy seekers, is a red flag for agencies tracking illicit crypto flows.
Shift to Foreign Platforms Driven by Tax Structure
Since July 2022, India has enforced the 1% TDS on all crypto sales, along with a 30% tax on capital gains. Additionally, traders cannot offset losses, making crypto taxation harsher than equities.
- Domestic exchanges faced liquidity issues and regulatory heat, prompting users to migrate to foreign platforms for ease of use and lower perceived oversight.
- The crackdown now signals the government’s intent to bring offshore activity within its regulatory fold.
