Bitcoin and Ethereum traders in India are dodging existing tax laws by routing trades through offshore exchanges, peer-to-peer networks, and wallet-to-wallet transfers. This has raised red flags for regulators and enforcement agencies.
As crypto adoption rises, the Indian government faces mounting challenges in enforcing its strict 1% TDS rule under Section 194S. Traders are exploiting gaps by shifting to offshore and decentralized exchanges, avoiding tax disclosures, and claiming non-taxable gifts.
Offshore and Decentralized Exchanges Help Avoid Tax in India
As of July 2022, India has mandated a 1% tax deducted at source (TDS) on all Virtual Digital Asset (VDA) transactions. However, many Indian crypto users are bypassing this rule by migrating to foreign platforms such as KuCoin, MEXC, and Gate.io. These exchanges are not registered in India and are not obligated to comply with local tax rules.
Additionally, decentralized exchanges (DEXs) like Uniswap and PancakeSwap operate via blockchain-based smart contracts without centralized oversight. Traders interacting with these platforms can avoid identification, TDS, and surveillance altogether.
A report from India’s Directorate of Enforcement (ED) in April 2025 indicated a 42% decline in TDS collections from crypto-related trades compared to the same period in 2024, underscoring growing non-compliance.
Peer-to-Peer (P2P) Trades Further Obscure Taxable Transactions
Many traders have turned to P2P networks—particularly Binance P2P and LocalBitcoins—to directly exchange crypto for INR. These trades often involve direct UPI or cash transactions between individuals and are not routed through centralized systems that report to the Income Tax Department.
“P2P is the easiest way to buy or sell USDT in India without triggering TDS or compliance checks,” said a Mumbai-based trader who requested anonymity.
This method makes it extremely difficult for authorities to detect unreported capital gains unless flagged by banks for suspicious cash flow patterns.
Wallet Transfers and “Gifting” Used to Disguise Income
Another common loophole involves transferring crypto assets to wallets owned by family members and claiming them as non-taxable “gifts.” Under Section 56(2)(x) of the Income Tax Act, gifts to certain relatives are exempt from tax regardless of value.
Additionally, intra-wallet transfers—especially across self-custody wallets—create layers of obfuscation, making it hard to distinguish genuine asset movement from profit-booking or laundering.
Blockchain analytics firm Chainalysis reported a 60% increase in Indian wallet-to-wallet transfers in 2024. A significant portion of these were later involved in offshore exchange deposits.
Indian Tax Enforcement Lags, Forensics Needed
Tax experts and legal analysts say that India’s enforcement framework lacks the digital forensic capacity to track sophisticated blockchain transactions in real time.
“The tax code is clear, but enforcement isn’t keeping pace with technology. Without deeper integration of blockchain analytics and international cooperation, evasion will continue,” said Neha Mehra, a Mumbai-based crypto tax attorney.
More KYC, Global Data Sharing Expected in India
To plug the gaps, India is reportedly in talks to join the OECD’s Crypto-Asset Reporting Framework (CARF). The CARF mandates automatic exchange of crypto KYC and transaction data between countries. Domestically, the CBDT and ED are working on new disclosure rules requiring Indian citizens to declare foreign crypto holdings annually.
Enforcement officers are also pushing for wallet registration and blockchain tracing mandates, similar to FATF guidelines.
“We need visibility into private wallets, offshore wallets, and their linkages to Indian bank accounts. That’s the only way to stop the leak,” said an ED official, under condition of anonymity.
