A trader needed 100 USDT. Instead of using an exchange, he called a friend. A quick bank transfer later, the friend sent the USDT from a cold wallet, and the deal was done in minutes. No exchange account, no trading platform, and no visible paperwork.
It felt like the simplest way to buy crypto. But beneath that seemingly casual transaction sits a surprisingly complex tax story. The buyer has acquired a Virtual Digital Asset. The friend has effectively sold one. Money has moved through the banking system, crypto has moved on-chain, and both events leave a trail that can matter at tax-filing time.
This kind of friend-to-friend crypto trade happens every day. People often assume that because there is no exchange involved, there is little for the tax department to notice. The reality is different. The tax implications do not disappear simply because the transaction occurs between two individuals. In fact, the seller’s side of the deal is often more complicated than the buyer’s.
What Happens on the Buyer’s Side
The person paying INR and receiving USDT is acquiring a virtual digital asset. Buying crypto is an acquisition, not a disposal. No VDA left his possession. No taxable event occurred under Section 115BBH.
The INR he paid becomes the acquisition cost of the USDT. When he eventually sells, swaps, or otherwise disposes of the USDT, the gain will be calculated as the INR value received at disposal minus the ₹X he paid his friend today.
From the buyer’s perspective, the only immediate obligation is to keep a record of what he paid and when. No tax arises now.
What Happens on the Seller's Side
This is where the question gets more interesting, and where the friend asking about “unknown source income” has correctly identified the risk.
The friend held 100 USDT. He sold it to someone for INR. Under Section 115BBH, this is a disposal of a VDA. The taxable gain is:
INR received minus the original acquisition cost of the USDT.
If the friend originally bought that 100 USDT for ₹8,200 and sold it for ₹8,500, the taxable gain is ₹300. Tax at 30% plus 4% cess: ₹93.60.
The fact that no Indian exchange was involved, that no TDS was deducted, and that the USDT came from a cold wallet does not change this. The disposal occurred. The gain is taxable in the financial year in which it occurred.
The friend should declare this in the Schedule VDA of his ITR.
The “Unexplained Income” Risk
The question correctly pointed out that the INR received by the friend could appear to be income from an unknown source. This is the more serious risk in the arrangement, and it is worth being specific about why.
When the friend receives, say, ₹8,500 in an online bank transfer from the buyer, that INR credit appears in his bank account. His bank account is linked to his PAN. The ITD’s systems cross-reference bank transaction flows with ITR declarations under Project Insight. An INR credit that does not correspond to declared salary, business income, or any other reported income category can trigger a query.
The risk is higher if the amounts are large or if they are frequent. A one-time ₹8,500 transfer from a friend is unlikely to generate scrutiny on its own. A pattern of regular INR receipts from multiple people, none of which appear in the ITR, is exactly what gets flagged.
How to avoid this risk: The friend should declare the USDT sale in Schedule VDA, and the INR proceeds will be accounted for as the sale consideration for a VDA disposal. The bank credit now has a corresponding ITR entry. The money has an explanation.
If the friend has been doing this regularly, buying USDT cheaply and selling it to contacts at a margin, the income may cross into business income territory rather than occasional capital gains, with potential GST and ITR-3 implications depending on the scale and frequency.
Does the Buyer Face Any Tax Risk?
The buyer is paying out INR, not receiving it. Outgoing payments do not create unexplained income. However, if the buyer’s total crypto acquisitions across the year are large and his declared income is modest, the source of the funds used to buy crypto could be questioned in a scrutiny assessment. This is the Section 69 source-of-funds question that applies to any large undocumented investment, crypto or otherwise.
For a single 100 USDT purchase, this is unlikely to be a concern. However, larger or repeated crypto purchases can invite questions about the source of funds used to acquire the assets.
What About TDS?
No TDS is deducted in this arrangement because neither party is an Indian exchange registered under FIU-IND. Section 194S requires Indian exchanges to deduct 1% TDS at the point of VDA transfers. It does not require individuals to deduct TDS when selling crypto peer-to-peer.
However, there is a provision for P2P transactions exceeding ₹10,000 in a financial year, in which the buyer may have a TDS obligation if they are classified as a “specified person” under Section 194S. For most retail individuals doing occasional P2P trades, this obligation is not commonly enforced, but it technically exists.
The absence of TDS does not mean the absence of tax. It means both parties are responsible for self-reporting rather than having the exchange handle it automatically.
A Summary for Both Sides
Person | What happened | Tax obligation |
Buyer (pays INR, receives USDT) | Acquired a VDA | No tax now. Record the acquisition cost (INR paid). Tax arises when USDT is eventually sold. |
Seller / friend (sends USDT, receives INR) | Disposed of a VDA | Tax on the gain (INR received minus original cost of USDT) in the current financial year. Declare in Schedule VDA. |
Seller’s bank account | Received an INR credit | Not separately taxable, but needs to be explained through the Schedule VDA declaration.
|
Which ITR Form and How to Declare
For the buyer: No immediate ITR entry required from this transaction. The acquisition cost should be noted for future use when the USDT is eventually sold.
For the seller: The USDT sale must appear in Schedule VDA. The correct form is ITR-2 if the seller is a salaried individual with no business income, or ITR-3 if they treat crypto trading as a business activity. The question about ITR-3 and business income in the original question is relevant if the friend does this regularly: occasional P2P sales sit comfortably in Schedule VDA of ITR-2, but frequent buying and selling for a margin starts to look like a trading business.
How KoinX Solves This
Sign up on KoinX to automatically track every taxable crypto transaction.
The seller’s specific challenge is reconstructing what the 100 USDT originally cost. If it came from a foreign exchange or an older wallet without a clear purchase record, the acquisition cost cannot be established without the transaction history. Without a documented acquisition cost, the ITD’s default is to treat the full sale proceeds as taxable income, not just the gain.
For P2P sellers who hold USDT across different wallets and exchanges and sell to friends informally over time, the accumulation of undocumented acquisition costs is what creates tax problems at filing time. Importing the wallet history into KoinX establishes the acquisition cost of every USDT unit from the original purchase, so when the P2P sale is eventually declared in Schedule VDA, the gain figure is correct rather than estimated.
Get tax-ready reports for INR-USDT transactions with KoinX.
If you received INR from a friend for USDT this year and are not sure what the correct Schedule VDA entry looks like, connecting your wallet on KoinX traces the full history from purchase to sale and produces the correct gain calculation automatically.
For the complete framework of how P2P transactions, wallet transfers, and informal crypto sales are taxed in India, the Crypto Tax India guide covers every scenario.
