A crypto trader had built a small side hustle that, on the surface, did not even look like a business. People sent him crypto. He converted it into another coin, kept a 1-3% commission, and returned the balance. No money ever reached a bank account. Everything happened entirely within the crypto ecosystem through wallets, token swaps, and small commission cuts on each transaction.
To him, it felt simple. If someone sent USDT and wanted BTC, he swapped it. If someone wanted another token, he handled the conversion. His earnings came only from the small percentage he retained on each transaction.
Then the obvious question arrived, “If no INR ever touches my bank account, is any of this taxable?”
What he did not realise was that tax was only a smaller issue hidden inside a much larger one. Because, from a regulatory perspective, accepting crypto from strangers, converting it, and sending it back for a fee does not look like casual trading. It looks very close to operating an informal crypto exchange or conversion service.
And in India, that changes the conversation completely. Accepting crypto from others, converting it, and returning it for a fee can resemble a crypto conversion service rather than personal trading, attracting scrutiny beyond normal investing.
A High-Risk Category
Under India’s Prevention of Money Laundering Act (PMLA), entities involved in crypto exchange and transfer services are expected to register with the Financial Intelligence Unit (FIU) and comply with reporting obligations. Operating a conversion service for third parties without that registration creates a compliance issue independent of any income tax calculation.
And regulators are paying attention to this exact structure.
In its FY 2024-25 report published in January 2026, the FIU specifically identified crypto-based hawala-style movement of funds as a recurring pattern in suspicious transaction reports filed by registered exchanges. A few months earlier, in November 2025, the Income Tax Department uncovered a ₹330 crore crypto hawala network in Kerala that allegedly operated through layered crypto conversions and intermediary wallets.
That does not automatically mean every person helping others swap crypto is involved in anything illegal. But the structure itself sits in a high-risk category from a compliance perspective.
Anyone regularly accepting crypto from unknown parties, converting it for a commission, and returning the balance should understand that the bigger issue may not be the tax return. It may be that the activity itself requires regulatory registration and legal structuring before it can continue.
The Commission Is Taxable
Under Section 115BBH of the Income Tax Act, the taxable event is the transfer of a virtual digital asset (VDA). What the trader receives and keeps as commission is a VDA. The moment those commission tokens are received, they are income. The moment they are eventually sold or converted, a second tax event occurs.
The fact that INR never entered the picture is irrelevant. India’s VDA tax framework taxes the receipt and disposal of crypto assets in rupee-equivalent terms, regardless of whether rupees were involved in the transaction.
What Happens in Each Transaction
The trader described the cycle as: receive crypto from someone, convert it to another crypto, keep 1-3% as commission, send the remainder back.
Here is what each step looks like under Indian tax law.
Step 1: Receiving crypto from the client
Receiving crypto from another person is not automatically a taxable event if it is received as consideration for a service to be performed. It is more like receiving a payment in kind for conversion services, classified as business income or income from other sources, taxable at the applicable slab rate on the INR fair market value of the crypto received.
However, the full amount received cannot be treated entirely as income because part of it is the principal that will be returned to the client. Only the commission portion is income.
Step 2: Converting the crypto
When the trader converts the received crypto to another crypto, that is a disposal of a VDA. If the value of the original crypto has changed between receipt and conversion, a gain or loss arises on that disposal under Section 115BBH.
Step 3: Sending the converted crypto back, keeping commission
The commission retained is income. The return of the remainder to the client is a disposal of a VDA, the converted crypto leaving the trader’s possession. Any gain on the difference between the acquisition cost of the converted crypto and its value at the point of return is also technically a disposal event.
Step 4: Eventually selling or converting the commission crypto
When the commission crypto is sold, swapped, or converted to INR, a Section 115BBH event occurs on the gain from the acquisition cost of the commission tokens to their sale value.
Tax Calculation on One Crypto Swap
For instance, a client sends 100 USDT worth ₹8,400 (₹84 per USDT) for conversion to ETH. The trader takes 2% as commission, so 2 USDT (₹168) is retained, and 98 USDT is converted to ETH and returned.
Component | Treatment | Amount |
2 USDT commission retained | Business income or income from other sources in the year received | ₹168 |
Tax on commission at slab rate (30% example) |
| ₹50.40 |
Disposal of 98 USDT for ETH | VDA disposal, gain if USDT value changed between receipt and conversion | Negligible if immediate |
Disposal of ETH back to client | VDA disposal, gain if ETH value changed between conversion and return | Negligible if immediate |
When commission USDT is eventually sold | 30% on the gain over acquisition cost | Depends on price at sale
|
If the conversion happens quickly and prices have not moved, the gains on the conversion disposal and the return disposal are close to zero. The primary taxable income is the commission itself, valued in INR on the day it was received.
If significant time passes between steps and crypto prices move, each intermediate conversion creates additional gain or loss events.
Why KuCoin’s Tax Report Can Be Misleading
The trader mentioned that his KuCoin tax report mainly shows withdrawals and conversions with no INR deposits or withdrawals. He interpreted this as evidence that nothing taxable happened.
The KuCoin report shows platform-level activity. It does not show the tax characterisation of each event under Indian law. Withdrawals and conversions are both potentially taxable events. The absence of INR flows in the report does not mean the absence of taxable income.
The INR equivalent of every conversion and every commission receipt needs to be calculated at the historical exchange rate on the date each event occurred. KuCoin’s export does not do this automatically in ITR-ready format. It provides the raw transaction data. The tax calculation is a separate step.
The Bigger Legal Risk
To reiterate, the tax question is the smaller of the two problems this activity creates.
Operating as a conversion intermediary for unknown third parties in India places the trader squarely in the definition of a VDA service provider under PMLA. Since 2023, crypto businesses in India, including conversion services, are required to register with the FIU, implement KYC procedures, monitor for suspicious transactions, and file suspicious transaction reports when required.
Not doing this is a money laundering compliance issue, with significantly more serious consequences than a tax compliance issue. The ₹330 crore Kerala hawala network uncovered in November 2025 used exactly this model: crypto received from clients, converted, returned minus commission, and the investigation involved both the Income Tax Department and the Enforcement Directorate under FEMA and PMLA.
Crypto exchanges are now required to flag transfers between hosted and unhosted wallets as part of their reporting obligations. A pattern of receiving crypto from unknown wallets, converting, and returning would be among the activity types exchanges are specifically trained to report.
None of this means the trader’s specific activity is necessarily hawala. That depends on who the clients are, what the funds represent, and whether there is a legitimate commercial purpose. But the structure matches the pattern that regulators are actively monitoring, and operating it without legal advice is a significant risk.
Fixing the Tax Record: Why KoinX
For a trader running multiple conversions per week, generating the correct tax record manually from KuCoin exports would require looking up historical crypto prices for every individual transaction date: the INR value of every incoming USDT, every outgoing ETH, every commission retained. When done across dozens of weekly transactions, this is the kind of work that either takes days or is done inaccurately. This is where a crypto tax platform becomes essential rather than optional, and where KoinX comes in.
Sign up on KoinX for accurate crypto tax calculations.
KoinX is used by over 1.5 million crypto investors across 100+ countries, with 800+ exchange and wallet integrations, including KuCoin.
Connect the KuCoin account once, and KoinX imports the full transaction history.
Once integration is completed, KoinX identifies each conversion as a VDA disposal, calculates the INR equivalent gain at the historical exchange rate on the exact date of each trade, and generates a Schedule VDA breakdown that maps every commission receipt and every conversion event to its correct tax treatment without any manual price lookups or missed events.
The commission receipt and the conversion disposal appear as two separate, correctly labelled lines. The CA receives a file that is already organised rather than a raw export that needs two days of reconstruction work before they can begin.
