One of the most honest descriptions of a crypto tax problem posted publicly is perhaps this:
The person had done their homework: they knew about the 30% tax, they understood TDS, and they had a plan. What they did not know was that the plan answers one question the government can ask but leaves a second entirely unanswered.
If you send crypto from a Trust Wallet or a hardware wallet to Binance, sell it for INR, and withdraw to your bank account, Binance will deduct 1% TDS at the point of sale. When you file your ITR, you declare the gain and pay 30% tax on it under Section 115BBH. If you have no record of buying the crypto, the entire sale amount is treated as your gain, and you pay 30% on all of it.
Yes, that is painful. But it is the straightforward part. The lesser-known part is what happens afterward.
The Tax Department Can Ask Two Separate Questions
When you sell crypto and pay tax, you have answered one question: how much did you earn from selling this asset, and what is the tax on that?
But the tax department can also ask a second, separate question: where did the money you used to buy this crypto come from in the first place?
These are two completely different questions. Answering the first one, by paying 30% tax, does not automatically answer the second one.
The second question is governed by Section 69 of the Income Tax Act, which addresses unexplained investments. In simple terms, if you own an asset and you cannot explain how you paid for it using money that was already declared in your tax returns, the government can treat the purchase amount as hidden income that you never reported.
And the tax on that hidden income is not 30%. It is 78%, which is 60% base tax plus a 25% surcharge on top of that, under Section 115BBE.
A Simple Example Using the Exact Scenario
The Redditor described it precisely: he holds crypto in a hardware wallet or Trust Wallet, transfers it to Binance, sells it for INR, pays any applicable TDS, and reports the transaction in his ITR. His concern is not the tax on the sale itself. The concern is what happens later if the Income Tax Department asks a different question: Where did the crypto originally come from?
If the crypto was acquired years ago through cash deals, informal P2P transactions, or other arrangements that left little or no documentation, proving the original source can become difficult. That is the real issue raised in the Reddit post, and it is separate from simply paying the 30% tax on the sale.
Let us run the numbers on that with a realistic portfolio size, and then show what happens if the tax department asks the second question.
Say the crypto is Bitcoin worth ₹65 lakh today. It was bought years ago for ₹10 lakh through a P2P arrangement, cash in hand, no bank transfer, no exchange record. There is no proof of the original purchase.
The Binance sale happens. TDS is deducted. The ITR is filed with 30% tax on the gain. Here is what that costs.
Tax on the gain (Section 115BBH):
What happened | Amount |
Sale price | ₹65,00,000 |
Your acquisition cost (but you cannot prove it) | ₹10,00,000 |
Since you cannot prove the cost, the entire sale may be treated as gain | ₹65,00,000 |
Tax at 30% | ₹19,50,000 |
4% cess | ₹78,000 |
Total paid | ₹20,28,000 |
You pay this, file your ITR, and think it is done.
Then the tax department looks at your return. They see a large crypto sale. They see that you have never reported crypto income before. They select your return for scrutiny and ask: Where did the ₹10 lakh you used to buy this Bitcoin in 2020 come from?
You have no bank record, no exchange record, no email confirmation. Nothing.
What the tax department can additionally demand (Section 69):
What they assess | Amount |
The ₹10 lakh purchase, treated as hidden income you never declared | ₹10,00,000 |
Tax at 60% on this | ₹6,00,000 |
Surcharge at 25% on that tax | ₹1,50,000 |
You now owe both amounts: ₹20,28,000 + ₹7,50,000 = ₹27,78,000
The ₹7.5 lakh extra is not due to underpaying the 30% tax. You paid that correctly. The extra demand is because you could not prove the ₹10 lakh purchase was legitimate money that had already been declared somewhere. The government treats it as money you hid.
Why This Feels Unfair But Is Legally Correct
Most people’s reaction to this is: “But I did earn that money legitimately. I just did not keep records.”
The tax department’s response is: prove it.
The law does not require them to assume your purchase was legitimate. It requires you to demonstrate that it was. If you cannot demonstrate it, Section 69 applies. The burden of proof sits entirely with the taxpayer, not with the department.
This is uncomfortable, but it is how the law works, and it has always worked this way for any undocumented investment, crypto or otherwise.
Here is what actually counts as documentation when the tax department asks about the source of funds for your crypto purchase.
What helps:
- A bank statement showing money going out around the time of the purchase, in an amount that matches what you paid
- An email or message confirming the trade from whoever you bought from
- A transaction record from the exchange or platform where you originally got the crypto
- ITR filings from the relevant years showing your income was large enough to support that purchase
When the Crypto Moves to a Centralised Exchange
Here is something most people do not realise until it is too late.
While your crypto sits in a Trust Wallet or a Ledger, the tax department cannot easily see it. There is no KYC record, no exchange report, no AIS entry. You have a private problem that is not yet public.
The moment you transfer that crypto to Binance or any FIU-registered Indian exchange, several things happen at once. The exchange records the incoming transfer. When you sell, a 1% TDS is deducted and reported to the ITD. A record appears in your Form 26AS and AIS. The tax department can now see a large crypto disposal by someone with no prior crypto income, and that is exactly the profile their automated systems flag for scrutiny.
Before the transfer: your documentation gap is your only problem.
After the transfer: it is visible to a system designed to ask questions about it.
This is why the preparation needs to happen before you send the crypto to the exchange, not after.
What You Can Do About This
The good news is that some of this is recoverable if you start early.
Step 1: Try to find whatever documentation exists
Check your old emails. Many people who bought crypto through P2P arrangements in 2019 or 2020 have email threads they have forgotten about. Check WhatsApp conversations from that period. Look at your bank statements to see if there are outflows around the time of the purchase that you can point to. Contact the exchange or platform where you originally received the crypto and request a transaction history export, because many platforms still hold historical data even for inactive accounts.
Step 2: Look at the on-chain history of your wallet
Every crypto transaction is recorded permanently on the blockchain. If you received the Bitcoin from an exchange wallet, that transfer is visible on-chain, including the origin address. In some cases, that origin address can be traced back to a specific exchange, which becomes evidence of how the crypto arrived in your wallet. All this can be easily accessible & all in one place with KoinX.
KoinX is used by over 1.5 million crypto investors across 100+ countries, with connections to 800+ exchanges and wallets.
For someone in this specific situation, here is what it does:
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Step 3: Talk to a CA before you transfer
A CA with experience in crypto taxation and scrutiny cases can look at whatever documentation you have managed to find and tell you honestly how strong your position is. They can advise on whether partial documentation is likely to satisfy the tax department for the amount you are cashing out, whether a voluntary disclosure makes sense, and how to structure the withdrawal to reduce scrutiny risk while staying fully within the law.
The same CA consulted after you have already transferred and sold, and received a notice, is working with fewer options and against a demand that already has a number on it.
For a full picture of what the tax department can see and what triggers scrutiny, the crypto tax audit triggers guide covers the complete enforcement framework. For the complete India crypto tax rules, the crypto tax India guide explains every provision in plain terms.
