I-T dept tracks offshore Binance wallets as crypto traders face heat for hidden profits

Indian tax authorities have intensified scrutiny of offshore Binance wallets amid concerns over undisclosed cryptocurrency profits. The Income Tax (I-T) department has directed its investigation units in several cities to report actions on such cases to the Central Board of Direct Taxes (CBDT) by 17 October, a report in the Economic Times stated. The focus is on high net-worth individuals and traders who reportedly used overseas platforms, particularly Binance, in an effort to evade domestic taxation on virtual digital asset (VDA) gains. Authorities are working to address compliance gaps as oversight of digital assets tightens.

A key driver in these investigations is the widespread use of USDT, a stablecoin pegged to the US dollar, as a medium to buy and swap other cryptocurrencies like Bitcoin and Ethereum. Traders often engage in multi-layered transactions, moving funds through decentralised blockchain networks into offshore accounts and conducting numerous swaps that rarely convert back to fiat currency. These complex operations, sometimes designed to obscure gains, may ultimately expose traders to tax liabilities if profits remain undeclared.

Many investors believed using offshore exchanges would help them avoid the 1% tax deducted at source (TDS) and a tax burden that can reach up to 42% under the old I-T regime. However, Binance's classification as a reporting entity with India’s Financial Intelligence Unit (FIU) has enabled sharing of transactional data with Indian authorities, reducing the anonymity previously associated with such trades.

The I-T department is also investigating peer-to-peer (P2P) transactions facilitated by Binance. These trades allowed buyers and sellers within India to settle payments through domestic bank channels or platforms like G-Pay, and occasionally in cash before that method was discontinued. Such P2P deals are under the scanner for potential non-disclosure of gains and circumvention of official remittance channels.

Traders seeking to avoid a paper trail have reportedly used informal networks, such as hawala, to fund crypto purchases instead of official banking routes. Some residents moved money abroad using the Reserve Bank of India’s liberalised remittance scheme (LRS), but certain banks require clients to declare non-investment in digital assets—a rule some investors bypass. Non-disclosure of such overseas holdings in tax return forms, particularly in the Schedule ‘Foreign Assets’ (FA) section, has emerged as a significant compliance concern.

CA Siddharth Banwat explained that the tax department is empowered to issue summons to confirm if due reporting is being done in income tax returns. If taxpayers have not reported the income, they can rectify this by filing an updated return, though at an extra tax cost.

Ashish Karundia, founder of the CA firm Ashish Karundia & Co., noted that the veil of anonymity shielding VDAs is falling apart. With transactional data from exchanges feeding into compliance frameworks, the tax department is better equipped to identify mismatches and trace unreported income.

The inclusion of VDAs as 'undisclosed income' and classification as 'property' under Section 56(2)(x) mark a regulatory pivot. Taxpayers must now exercise heightened diligence. Failure to report VDAs accurately may trigger reassessment or scrutiny, with potential penalties under Section 270A. Omission from Schedule FA could attract the Black Money Act, fines, and prosecution. Taxpayers should reconcile their VDA activity and consider corrective mechanisms such as the updated return (ITR-U).

Crypto taxation

For FY 2024–25, Indian tax law defines cryptocurrencies as Virtual Digital Assets (VDAs) under the Income Tax Act, 1961, through Section 2(47A). This includes any cryptographically created code, token, or number — such as Bitcoin, Ethereum, or NFTs — but excludes legal tender like the rupee or other fiat currencies. While trading and holding VDAs are legal, they are not recognized as official payment methods.

Crypto in India remains permitted but tightly regulated, especially for taxation and anti-money laundering (AML) compliance. Oversight is shared among the CBDT, FIU-IND, RBI, and SEBI. The Income Tax (No. 2) Bill, 2025, which replaced the 1961 Act, further formalized this structure, defining taxable events and compliance obligations for VDA transactions.