In the last few months, crypto users received Section 68 notices in early 2025. None of them were flagged for large, undeclared trading gains. They were flagged because Binance P2P transactions lacked a verified counterparty PAN, and the Income Tax Department treated the entire credited amount as an unexplained cash credit, not just the profit on the trade.
That distinction matters more than most CAs realise. It’s because your exposure under these provisions will be calculated on the full credited or discovered amount , rather than the gain. Under Section 115BBE, the effective tax rate is 78%, 60% flat tax, 25% surcharge on tax, and 4% cess on (tax + surcharge). If the Assessing Officer invokes Section 271AAC for non-disclosure, total liability can reach 137% of the credited amount. Interest under Sections 234A and 234B runs from the original due date.
This guide is built for CAs defending clients who have received unexplained credit notices tied to crypto activity. It covers which section applies to which scenario, how the ITD triggers these notices, evidence you need to answer them, and how to prepare replies at the AO, CIT(A), and ITAT levels.
Key Takeaways
- Section 68 applies when a credited amount cannot be satisfactorily explained; P2P receipts without counterparty KYC are the most common crypto trigger.
- Section 69 applies to investments not recorded in books; unreported exchange balances and hardware wallet holdings discovered during search fall here.
- Section 69A covers undisclosed crypto held as a valuable article, triggered when the ITD discovers wallet holdings during a survey or search.
- Section 115BBE taxes additions under Sections 68 to 69D at 60% flat plus 25% surcharge and 4% cess, effective rate 78%, with the rate rising to 137% under Section 271AAC penalty.
- A satisfactory explanation under Section 68 requires identity of the counterparty, source of funds, and genuine commercial purpose; transaction screenshots alone do not qualify.
What are Sections 68 and 69 of the Income Tax Act?
These two provisions form the core of unexplained income enforcement. Understanding exactly what each covers, and where the burden lies, determines which documents a CA needs to build a defence before the AO issues an order. Here’s what each section covers:
Section 68: Unexplained Cash Credits
Section 68 of the Income Tax Act, 1961, is triggered when a sum appears as a credit in the books of an assessee and the assessee cannot satisfactorily explain its nature and source to the Assessing Officer. The entire credited amount, not the profit on it, is treated as income for that financial year.
However, before adding the unexplained amount to income, the AO must look out for the below three conditions:
- A credit must exist in books of account; loose records or unverified logs do not count
- The AO must conduct an inquiry and call for an explanation before making an addition
- If the explanation is absent or unsatisfactory, the sum is added as income under Section 115BBE
Section 69: Unexplained Investments
Section 69 of the Income Tax Act applies when a person is found to have an investment that is not recorded in their books and cannot be explained as coming from already taxed income. In such cases, the value of that investment is treated as income in the year it is discovered, not the year it was actually made.
To add such amount in the Income, the AO must meet four conditions:
- The investment must be unrecorded in books of account
- Discovery can occur through search, survey, or third-party information
- The assessee must prove acquisition from disclosed, taxed income
- Failure to provide satisfactory explanation results in the full fair market value being added to income
Section 69A: Unexplained Money, Valuables, and Crypto Holdings
Section 69A of the Income Tax Act, 1961 applies to money, bullion, jewellery, or other valuable articles found in possession of the assessee. For crypto purposes, this provision becomes relevant when the ITD discovers wallet balances or exchange holdings during a search that are not reflected anywhere in the return.x
How Section 115BBE Impacts an Addition Under Sections 68 to 69?
Once an addition is made under any Section between 68 and 69, Section 115BBE applies a punitive rate. No deductions, exemptions, or loss set-offs are permitted against this income. The arithmetic below applies to every addition, regardless of the client’s overall tax position.
INR 10,00,000 addition under Section 68 | |
Tax at 60% | INR 6,00,000 |
Surcharge at 25% on tax | INR 1,50,000 |
Cess at 4% | INR 30,000 |
Total tax payable | INR 7,80,000 (78%) |
How Does the ITD Trigger Section 68 and 69 Notices for Crypto?
A Section 68 or 69 notice does not arrive randomly. The ITD uses four distinct data sources to identify unexplained crypto credits. Understanding each one tells a CA the evidence an AO is relying on when the notice lands. So let’s see:
Annual Information Statement and SFT Data
Every Indian exchange registered with the Financial Intelligence Unit files Statement of Financial Transactions data with the ITD. This data reflects gross transaction volume, not net gains. When a client’s AIS shows INR 50 lakh in crypto activity but Schedule VDA reflects INR 2 lakh, the gap is flagged automatically.
The ITD’s reconciliation process identifies this discrepancy without any manual review. A Section 68 notice follows when the Assessing Officer cannot trace the credited amount to any declared income source in the return.
Section 194S TDS Without a Matching ITR Entry
When an exchange deducts 1% TDS under Section 194S on a disposal, that credit appears in the client’s Form 26AS. The ITD expects a corresponding Schedule VDA entry for every TDS credit. A TDS deduction without a declared gain is one of the cleanest triggers for a Section 68 notice since the credit is visible, but the income is not.
Bank Account Inflows From P2P Settlements
On P2P platforms, the buyer transfers INR directly to the seller’s bank account. Banks file SFT data on high-value account credits. When INR settlements from P2P activity appear without counterparty PAN, KYC records, or a matching Schedule VDA entry, the AO invokes Section 68 on the full transfer value, not the profit margin.
Search, Survey, and Hardware Wallet Discovery
During a search under Section 132 or a survey under Section 133A, investigators look for undisclosed assets. A hardware wallet containing unreported tokens, or a foreign exchange account accessed during premises inspection, triggers Section 69 or Section 69A. The fair market value of any amount at the date of discovery is added to the income.
Which Section Applies to Which Crypto Scenario?
A Section 68 reply will not succeed against a Section 69 addition. So, your defence strategy must depend on which provision applies to a specific transaction or holding. This mapping will further help you determine the documents required and the legal arguments available. So, let us understand which section applies to which crypto scenario:
P2P Trades Without Counterparty KYC - Section 68
This is the most common crypto Section 68 scenario in India. The counterparty transfers INR to the client’s bank account. The client transfers crypto in return. The INR credit appears in the client’s books and bank records. However, without verified PAN, Aadhaar, or KYC details of the counterparty, the entire receipt is treated as an unexplained cash credit.
The defence requires proof of three key things:
- Identity of the counterparty: Clear proof of who made the payment.
- Creditworthiness: Evidence that the counterparty actually had sufficient funds to make the transaction.
- Genuine commercial purpose: Proof that the transaction was a real crypto sale, not a cash parking or disguised transfer.
Undisclosed Foreign Exchange Balances - Section 69
A client who held crypto on Binance, Bybit, or another foreign platform without declaring it may be penalized per Section 69 regulations. If discovered through a survey, FIU-IND information, or voluntary disclosure during assessment, the fair market value or cost of acquisition at the date of discovery becomes the addition. The client bears the burden of proving the acquisition was made using previously taxed income.
Undisclosed DeFi Activity - Section 68 or Section 69C
DeFi income, liquidity mining returns, yield farming rewards, and protocol tokens that were never declared present a dual risk. If tokens appear as a credit in any connected account or wallet, Section 68 applies to the receipt. If the client deployed undisclosed funds into DeFi protocols, Section 69C applies to the undisclosed expenditure used for that deployment.
AIS Mismatch on Exchange Trades - Section 68
When the exchange’s SFT data shows total transaction volume and the client declared only net gain in Schedule VDA, the difference reads as an unexplained credit. And this is not a capital gains dispute, it is a source-of-funds question. The CA must reconcile gross volume to net gain using transaction-level records, presenting each step with documentary support.
What Does "Satisfactory Explanation" Mean Under Section 68 for Crypto?
A Section 68 defence depends on one key point: whether the Assessing Officer finds the given explanation satisfactory. Courts have defined this standard clearly across decades of jurisprudence. A CA who understands it can structure the reply to meet it precisely, rather than submitting documents that bypass the threshold.
The Three-Part Test: Identity, Creditworthiness, and Genuineness
For a Section 68 reply to succeed, the following three elements must be addressed:
- Identity means the counterparty is identifiable via PAN, Aadhaar, or another government-issued document.
- Creditworthiness means the counterparty has the financial capacity to make the payment.
- Genuineness confirms the transaction was commercially real, not a circular or accommodating arrangement.
Addressing only one or two of these elements is the most common reason well-documented replies still fail at the AO stage.
What Courts Have Accepted as Sufficient Evidence?
Income Tax Appellate Tribunal (ITAT) and High Court decisions consistently accept the following as sufficient evidence:
- Bank statement of the counterparty showing the debit corresponding to the credit in the client’s account
- PAN and KYC details confirmed at the time of transaction
- Exchange transaction ID and timestamp confirming the crypto transfer occurred
- Signed agreement or invoice for the underlying transaction where applicable
What Courts Have Rejected?
Post-dated vouchers prepared after the notice arrives carry very little weight. Chat screenshots from Binance P2P, without government-issued identification of the counterparty, have been specifically rejected in Section 68 crypto cases.
Oral explanations without corroborating documents are treated as unsatisfactory by default. Where books of account were not maintained, the AO is not even required to call for explanations before making an addition.
The Crypto-Specific Gap: Foreign Counterparty Identity
When the P2P counterparty is a foreign user, obtaining PAN is not possible. Courts have accepted passport details, foreign tax identification numbers, and exchange-generated KYC certificates where the platform is FIU-IND registered. Trades on unregistered foreign platforms carry the highest risk, as no verified identity record exists. Thus, the three-part test cannot be fully satisfied.
How to Build a Section 68 Defence for a Crypto Client?
Once the relevant transactions are identified and the trigger source is confirmed, the defence follows a clear sequence. Since every step builds on the previous one, skipping any step typically means the reply fails to address all three elements of the satisfactory explanation standard. So, here is how you can create a defense for your client:
Step 1: Map Each Addition to a Specific Transaction
Before drafting a single word of the reply, identify the exact transaction behind every addition in the notice, exchange name, trade date, counterparty identifier, and INR value. Build a transaction map that links each addition to a specific trade record. Responding to additions in aggregate, without this mapping, almost always fails.
Step 2: Pull All Primary Records
The documentary foundation of the reply comes from four sources:
- Exchange account statement: full transaction history for the assessment year
- Bank account statement: INR credit or debit corresponding to each trade
- Form 26AS and AIS: to confirm what the ITD has already seen and flagged
- Schedule VDA as filed: to confirm what was declared and what was not
Request official account statements from each exchange in authenticated PDF format. Do not rely on screenshots or browser exports.
Step 3: Establish Counterparty Identity
This step determines the outcome of the reply. For Indian counterparties, obtain PAN and a bank statement showing their outgoing payment that corresponds to the credit in the client’s account.
For foreign counterparties on FIU-IND registered exchanges, ask the platform to provide the counterparty’s KYC certificate. If the trade happens on an unregistered platform, treat it as high risk and escalate immediately, as KYC verification may not be possible and voluntary disclosure may need to be considered.
Step 4: Reconcile AIS Gross Volume to Schedule VDA
Create a reconciliation table for each exchange showing how crypto income is derived. For every exchange, list total gross credits as per SFT data, subtract the cost of acquisition for each trade, and reconcile it with the net gain reported in Schedule VDA. So, your formula will be:
Net Gain (Schedule VDA) = Total Gross Credits (SFT Data) − Cost of Acquisition (per trade)
Each row should directly correspond to an individual exchange transaction record. Present this as a numbered annexure to the reply. An Assessing Officer who can follow the reconciliation from gross AIS volume to declared net gain has no remaining basis for a Section 68 addition.
Step 5: Draft the AO Reply
Structure the reply in four parts: an opening paragraph acknowledging the notice and identifying the assessment year, a section-by-section response to each addition with supporting annexures referenced by number, a legal submissions section citing ITAT precedents on the satisfactory explanation standard, and a closing paragraph requesting cancellation of the proposed addition on the grounds that all three elements, identity, creditworthiness, and genuineness, have been established.
Where the client’s records are complete and counterparty KYC has been obtained, ITAT consistently sets aside Section 68 additions that were made without proper inquiry or without considering the explanation furnished.
How to Build a Section 69 Defence for Undisclosed Crypto Holdings?
Section 69 defences work differently from Section 68. The focus shifts from the counterparty to the source of funds used to acquire the asset. The three-part test does not apply here, and the question is simpler: can the client prove the crypto was bought from income that had already been taxed?
Step 1: Identify the Asset and the Year of Discovery
Section 69 adds the value of the asset in the year of discovery, not the year of purchase. The first task is confirming exactly when the ITD discovered or was informed of the holding, because that date determines both the addition year and the FMV used to calculate the addition.
Obtain the search or survey report, or the third-party information notice, that identifies the date of discovery. This document also confirms whether Section 69 or Section 69A applies, investment versus valuable article.
Step 2: Pull Acquisition Records
The core documentary task is establishing that the crypto was acquired from income already charged to tax. Collect the following for each undisclosed holding:
- Bank statement showing the outgoing INR transfer used to purchase the crypto
- Exchange purchase confirmation with date, quantity, and INR value
- ITR extract for the financial year in which the purchase was made, showing the declared income that funded it
The chain must be unbroken and move from declared income to bank debit to exchange purchase.
Step 3: Match Acquisition Source to Declared Income
Cross-reference the purchase amount against the client’s declared income and bank records for the relevant year. If one of your clients earned INR 12,00,000 that year, you declared it in the ITR, they paid tax on this amount, and the bank statement shows INR 3,00,000 transferred to an exchange for crypto, the acquisition is explainable from taxed income.
Prepare this as a written reconciliation, income declared, tax paid, bank transfer, and exchange purchase, presented as a single annexure. The AO should be able to follow the entire chain at a glance.
Step 4: Establish the Correct Fair Market Value
The addition under Section 69 is based on the fair market value of the holding at the date of discovery, not the purchase price or the current market value. Pull the exchange price data for each asset on the exact date of discovery. Use exchange-generated historical price reports where available.
If the client purchased ETH for INR 3,00,000 in FY 2021-22 and it was discovered in FY 2025-26 at a value of INR 18,00,000, the addition is INR 18,00,000, the full discovery-date value. The 78% rate applies to that figure under Section 115BBE.
Step 5: Evaluate Voluntary Disclosure Where Records are Unavailable
Where the client is genuinely unable to produce acquisition records due to reasons like lost exchange access, a defunct platform, or purchases made before they started maintaining records, consider voluntary disclosure. This can be done through a revised return under Section 139(5) or an updated return under Section 139(8A) before the AO finalises the assessment.
Disclosure before the order is passed significantly reduces Section 271AAC penalty exposure. It does not eliminate the 78% tax rate under Section 115BBE, but it removes the additional 10% penalty layer that applies when income is discovered rather than declared.
What Happens After the AO Stage?
If the Assessing Officer rejects the explanation and confirms the addition, the defence moves to the appellate stage. Each stage has a specific procedure, and the actions taken immediately after receiving the assessment order determine whether the client faces coercive recovery while the appeal is pending. Here’s what to do post AO stage:
Filing the CIT(A) Appeal
The appeal against a Section 68 or Section 69 assessment order goes to the Commissioner of Income Tax (Appeals). File within 30 days of receiving the order. Grounds must specifically state that the AO failed to conduct proper inquiry, failed to apply the satisfactory explanation standard correctly, or made an addition mechanically without first rejecting the books of account.
Applying for Stay of Demand
A Section 68 or 69 addition at 78% creates an immediate, large tax demand. Apply for stay of demand under Section 220(6) simultaneously with a CIT(A) filing. The stay application should demonstrate: genuine dispute on the merits, prima facie case supported by documentary evidence, and financial hardship if immediate recovery is enforced.
Courts consistently grant stay where the assessee furnished substantive evidence that the AO did not properly consider.
Arguments that Have Succeeded at ITAT
The following grounds consistently succeed at ITAT in crypto-related Section 68 cases:
- The AO made the addition without first calling for and considering the assessee’s explanation
- The AO did not reject the books of account before invoking Section 68
- Exchange records and bank statements were furnished but were not addressed in the assessment order
- The addition covered the entire gross SFT volume rather than the specific unexplained portion
- Counterparty KYC was available and submitted but treated as insufficient without stated reasons
Fresh Evidence at ITAT
Where additional documents, counterparty bank statements, foreign KYC certificates, exchange reconciliation reports, were not produced at the AO stage, they can be admitted at ITAT through Rule 29 of the Income Tax (Appellate Tribunal) Rules, 1963. File a formal application explaining why the documents were not produced earlier.
ITAT has admitted such evidence in crypto cases where the delay resulted from difficulty obtaining records from foreign platforms or FIU-IND registered exchanges.
How to Prevent a Section 68 or 69 Notice Before Filing?
Every notice handled at the AO stage costs time, documentation effort, and litigation risk. The most effective way to handle a Section 68 or 69 notice is to prevent it from being issued. The steps below should become standard pre-filing procedure for every crypto client, regardless of whether they are active traders or occasional P2P users.
AIS Reconciliation Before Filing
Download the client’s AIS at least two weeks before filing. Map every crypto credit entry to the corresponding Schedule VDA entry. Where the AIS shows a credit the client has not declared, or has declared differently, identify the source and prepare the reconciliation before the return is submitted.
Reconciling after a notice arrives is harder, slower, and less credible to the AO than a return that was clearly prepared with the AIS in hand.
Building a Counterparty KYC File
For every P2P trade, advise the client to collect the following at the time of the trade instead of working on them retrospectively:
- Counterparty PAN or Aadhaar for Indian counterparties
- Exchange-generated KYC certificate for foreign counterparties on FIU-IND registered platforms
- Bank statement showing the corresponding INR transfer
This information cannot be recovered from most platforms after the trade is settled. The window to collect it is at the point of transaction.
Disclosing Foreign Exchange Holdings in Schedule FA
Indian residents holding crypto on foreign exchanges must disclose these balances in Schedule FA of ITR-2 or ITR-3. Non-disclosure is an offence under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, a separate and more severe provision than Section 69. Capture every foreign platform balance as at 31st March each year, before the return is filed.
Manually tracking AIS entries, reconciling gross exchange volumes, and maintaining counterparty KYC files across multiple platforms is the part of this process that consumes the most time. KoinX makes it significantly faster, and the next section covers exactly how.
How KoinX Helps CAs Defend Crypto Clients Against Section 68 and 69 Notices?
With Section 68 notice, the first obstacle is always data, like exchange statements across multiple platforms, AIS figures that do not reconcile to declared income, and counterparty records that were never collected at the time of the trade. KoinX provides CAs with clean, exchange-verified, transaction-level records that form the documentary foundation of any Section 68 or 69 defence.
Consolidated Transaction Records Across 800+ Exchanges
KoinX imports transaction data directly from over 800 exchanges and wallets, including CoinDCX, WazirX, Binance, and Bybit. For each transaction, it records the date, INR FMV at the time of transfer, counterparty details where available, and the corresponding TDS deduction, all in one place, ready to be presented as an annexure to the AO reply.
AIS Reconciliation Report
KoinX generates a reconciliation report that maps gross SFT transaction volume, the figure the ITD sees in AIS, to the net Schedule VDA gain declared in the ITR. This report, produced with transaction-level supporting data, is precisely the document an Assessing Officer needs to close a Section 68 mismatch query without issuing a formal addition.
Schedule VDA Report for ITR-2 and ITR-3
For clients who need to file or revise an ITR as part of a voluntary disclosure strategy, KoinX generates an ITR-ready Schedule VDA report for both ITR-2 and ITR-3. Each disposal entry includes date of acquisition, date of transfer, cost of acquisition, and gain, fully formatted and ready for submission.
TDS Reconciliation Tool
KoinX’s TDS reconciliation tool, live before 10th June 2026, cross-references every 1% TDS deduction under Section 194S against the corresponding Schedule VDA entry. For Section 68 notices triggered by an unmatched TDS credit in Form 26AS, this tool identifies the specific transaction and generates the reconciliation document needed for the AO reply without requiring manual cross-checking.
If your client has received a Section 68 or 69 notice tied to crypto activity, the strength of the defence depends entirely on the quality of the underlying transaction data. Generate a complete transaction and AIS reconciliation report on KoinX and build your client’s defence based on verified numbers.
Conclusion
A Section 68 or 69 notice on crypto income is not an indication that the case is lost. In the vast majority of cases, these additions are made mechanically, because the AIS flagged a mismatch, not because the ITD has evidence of actual concealment. Where the client can establish identity, source of funds, and commercial genuineness for each credited amount, courts have consistently set aside the additions.
The practical challenge is documentation, specifically, obtaining counterparty KYC records and exchange reconciliation data after the fact. That is a harder problem than the legal one. The CA who builds these records into the client’s filing process before each ITR is submitted will rarely need to defend a Section 68 notice at all.
KoinX provides the transaction records, AIS reconciliation reports, and Schedule VDA data that make both the defence and the prevention significantly faster, so you (as a CA) can focus on the legal argument, not the data problem.
Frequently Asked Questions
My Client Received a Section 68 Notice for a P2P Crypto Trade but Has Screenshots of the Transaction. Is that Sufficient?
No. Screenshots of chat logs and exchange trade confirmations do not satisfy the three-part test under Section 68. An Assessing Officer requires government-issued identity of the counterparty, evidence of their financial capacity to make the payment, and proof that the transaction was commercially genuine. The reply must address all three elements with documentary support, not just evidence that the trade occurred.
The AO Has Added the Entire SFT Gross Volume as Unexplained Income, Not Just the Gain. Is that Legally Correct?
It is a common overreach. The SFT data reflects total transaction volume, not unexplained income. The AO must identify which specific credits are unexplained, not add the gross volume as a single unexplained amount. File an objection at the draft assessment stage, or raise it as the primary ground in the CIT(A) appeal. Present the gross-to-net reconciliation table as the supporting annexure.
My Client Had Crypto on Binance that Was Never Declared. Does Section 69 or the Black Money Act Apply?
Both may apply simultaneously. Section 69 governs the income tax addition, the FMV of the undisclosed holding at the date of discovery, taxed at 78% under Section 115BBE. The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 applies separately to non-disclosure of foreign assets in Schedule FA. The Black Money Act carries a penalty of three times the tax on the undisclosed amount, separate from the Section 69 addition.
What is the Difference Between a Section 68 Addition and a Section 270A Under-Reporting Penalty? Can Both Apply to the Same Transaction?
They are mutually exclusive for the same income. Once income is taxed under Section 115BBE following a Section 68 addition, Section 270A does not apply to that amount. However, if the client under-reported other income in the same return, not the Section 68 addition itself, Section 270A can apply to that separate under-reported income. The two provisions operate on different portions of the total income.
My Client Can Identify the Counterparty but the Counterparty Refuses to Cooperate. How Do We Satisfy the Creditworthiness Test?
Identity and creditworthiness are separate elements. Where the counterparty is identified, PAN obtained, bank transfer confirmed, but refuses to provide their own bank statement, courts have accepted the assessee’s bank records showing the inward credit alongside the counterparty’s PAN as sufficient. The AO may independently verify the counterparty’s financial position. The assessee’s obligation is to establish identity and point to the source, not to compel a third party to cooperate.
Can Fresh Evidence Be Submitted at ITAT That Was Not Produced Before the AO?
Yes, through a formal application under Rule 29 of the Income Tax (Appellate Tribunal) Rules, 1963. The application must explain why the documents were not produced at the earlier stage. ITAT has admitted foreign exchange records, counterparty KYC certificates, and exchange reconciliation reports in crypto cases where the delay resulted from the difficulty of obtaining records from overseas platforms. The application must be filed before the hearing date.
