A crypto user never got into crypto to invest or trade. She bought USDT on Binance for one reason only: to pay for a prop trading challenge. Then, she raised a question that many first-time users eventually ask: Do I now have to pay crypto tax or even file an ITR?
Thousands of Indian traders are entering crypto this way without thinking of themselves as crypto users. Many prop trading firms accept challenge fees only in USDT, making a small crypto purchase the first step towards opening a funded account. What feels like a simple payment, however, can still create tax and reporting obligations under Indian law.
This is because even if you never traded crypto for profit and bought USDT only to make a payment, the purchase of USDT and its subsequent use are treated as two separate events under the tax rules. Whether any tax is payable depends on what happened between those two steps, but the compliance journey begins the moment crypto is used as the payment method.
Why Prop Trading Often Starts With Crypto
Many prop trading firms require challenge fees to be paid in USDT. As a result, people who have never invested or traded in crypto often end up buying it simply to access a funded trading account. What feels like a simple payment method can unexpectedly bring them within India’s crypto tax framework.
Under Indian tax law, USDT is treated as a Virtual Digital Asset (VDA). That means using it to pay for a prop trading challenge is also the transfer of a VDA. Even if the USDT was bought only minutes earlier and no meaningful profit was made, the transaction can still create tax reporting obligations.
What many traders don’t realise is that paying in USDT can create tax and filing obligations in India. But Indian tax rules still treat that transaction as a crypto transaction. Under the Indian tax law, USDT is treated as a virtual digital asset (VDA). That means using it to make a payment can have tax consequences, just like selling crypto. So, the moment you send USDT to pay for the challenge, you will have used crypto to buy a service. And, in India, the disposal of a VDA is a taxable event.
This is not unique to prop firms. The same rule applies whenever you use USDT to pay for something, whether it’s a software subscription, an online service, or a prop trading challenge. The prop firm context surfaces it in a specific, concentrated population: traders who are not crypto investors in any meaningful sense, who simply needed a payment method that a foreign platform accepted, and who now have to navigate a tax framework designed for people who were actually trying to make money from crypto.
What Happens at Each Step
At first, it feels like you’re making just one payment. But from a tax perspective, it’s actually a series of separate events. Here’s what happens at each stage and why it matters.
Step 1: Buying USDT on Binance
Buying USDT with INR is an acquisition, but it does not trigger tax. The price you paid becomes your purchase cost for future tax calculations.
Step 2: Spending USDT on the Prop Firm Account
The tax event happens when you give up ownership of the USDT in exchange for a service. Whether you made a profit or not is a separate question. Your tax liability will be calculated as follows:
INR equivalent of USDT at the time of the transaction minus the INR cost of acquiring that USDT.
For USDT, which is a stablecoin pegged to the US dollar, the price on any given day is approximately the USD-INR exchange rate. If you bought USDT at Rs 83.50 per unit and spent it the same day when it was still worth Rs 83.50, the gain per unit is zero. On a same-day transaction, the gain is near-zero and the Section 115BBH tax on that gain is therefore also near-zero.
Example:
Suppose a trader buys 100 USDT at Rs 83.50 each (total spend: Rs 8,350) to pay for a prop challenge. He spends it the same afternoon when USDT is still trading at Rs 83.50.
Component | Amount |
USDT purchased | 100 units at Rs 83.50 = Rs 8,350 |
USDT spent on prop account | 100 units at Rs 83.50 = Rs 8,350 |
Taxable gain under Section 115BBH | Rs 0 |
Tax at 30% + 4% cess | Rs 0
|
If the trader had bought USDT at Rs 83.00 and spent it a week later when USDT had moved to Rs 84.20, the gain would be Rs 120 on 100 units. The tax on that gain would be 30% under Section 115BBH, plus any applicable surcharge and 4% health and education cess.
What Happens When the Prop Firm Pays Out
Buying USDT to pay a challenge fee is only the first part of the journey. If a trader later qualifies for a funded account and starts receiving payouts in USDT, a new set of tax questions arises.
The tax treatment of those payouts depends on the facts of the case. Depending on the nature of the activity, they may be treated as business income, professional income, or under another applicable head of income. The value of the USDT at the time it is received is generally relevant for determining that tax treatment.
If the USDT is later sold or converted into INR, that conversion is a separate VDA disposal. Any gain between the INR value when the USDT was received and its value when it was sold may be taxable under Section 115BBH.
If you’re receiving regular payouts from a prop trading firm, it’s important to determine both the correct head of income for the receipt and the tax treatment when the USDT is eventually disposed of. For a detailed discussion on reporting crypto receipts and choosing the correct ITR form, see the India crypto tax guide.
How KoinX Simplifies Recordkeeping
Whether you’re only paying a prop firm challenge fee or later receiving payouts in USDT, one thing remains the same: you’ll need accurate records of every crypto transaction. That’s because you’ll need to calculate any gains correctly and report them in your ITR where required.
Keeping those records isn’t always easy. A trader may buy USDT on Binance, send it to a foreign prop trading platform, and later receive payouts in the same wallet. Since the payment is made to a foreign platform, it may not automatically appear in Indian tax records such as Form 26AS. That means it’s up to the taxpayer to maintain a complete record of what happened.
The reporting responsibility doesn’t disappear just because the transaction isn’t automatically reflected in Indian tax records. Whether any tax is ultimately payable depends on the facts, but taxpayers are still responsible for accurately reporting taxable crypto transactions and maintaining supporting records.
Sign up on KoinX, and install the KoinX Chrome Extension for Binance. The extension automatically fetches your Binance transaction history, including USDT purchases and outgoing transfers, without requiring manual CSV uploads. If you’ve also used Binance P2P or products like Dual Investment, you can import those histories separately so your records are complete.
Connect Binance to KoinX and automatically import every USDT purchase and payment.
Once the transactions are imported, KoinX calculates the acquisition cost and any gain on each USDT disposal using historical INR values. It then prepares a Schedule VDA Report with the figures required for your ITR, including the acquisition cost, sale consideration, and taxable gain.
Every USDT payment is recorded as a disposal, with the gain calculated in INR.
Key Takeway
Many traders buy USDT only because a prop firm requires it as a payment method. What seems like a simple fee payment can create tax reporting obligations that most first-time users never expect.
The amount of tax may be small, or even nil in some cases, but the reporting requirements don’t disappear. Keeping complete records and reporting the transaction correctly is what helps avoid problems later.
