In recent years, the Income Tax Department has intensified its focus on cryptocurrency activity, both in India and abroad. With billions of digital transactions now under review, the department is using advanced methods to ensure that taxpayers do not bypass compliance rules. Crypto users who once believed their trades were invisible are now finding themselves on the radar of strict monitoring systems.
From artificial intelligence to international data-sharing frameworks, the department’s approach has become highly sophisticated. Indian exchanges are compelled to report transactions, while foreign holdings are tracked through global cooperation agreements. This article explains in detail how the IT Department monitors trades on domestic and international platforms, and what this means for anyone dealing with cryptocurrencies.
Tracking Cryptocurrencies Through TDS Under Section 194S
Since July 2022, a 1 percent TDS is levied on crypto transfers above set thresholds. Indian exchanges deduct this tax at the time of sale and deposit it with the government. This creates a verifiable record of each taxable transaction, linking buyers and sellers directly to their PAN.
Reflection in AIS and Form 26AS
All TDS deductions appear automatically in the taxpayer’s Annual Information Statement and Form 26AS. These records provide a transparent view of crypto activity for both taxpayers and the Income Tax Department. They serve as a primary tool for verifying compliance with reporting obligations.
Mismatch Detection
If the crypto income reported on a tax return does not match the TDS data, it immediately raises a red flag. Such mismatches are one of the most common triggers for notices. The system ensures that undeclared trades or underreported profits cannot go unnoticed.
Also Read: 1% TDS on Crypto in India: How Does It Work?
Data From Indian Exchanges and Service Providers
If the crypto income reported on a tax return does not match the TDS data, it immediately raises a red flag. Such mismatches are one of the most common triggers for notices. The system ensures that undeclared trades or underreported profits cannot go unnoticed.
Mandatory KYC Requirements
All Indian exchanges are required to follow strict Know Your Customer procedures. Every user must submit identity and address proof before trading. These measures ensure that each transaction is tied to a verified individual. This helps the authorities track activity and prevents users from hiding behind anonymous accounts.
FIU-IND Registration
Most major exchanges in India are registered with the Financial Intelligence Unit under the Prevention of Money Laundering Act. Registration obligates them to maintain detailed logs of high-value or suspicious trades. They must report these transactions to the FIU, which then shares the information with tax and enforcement authorities for investigation.
Sharing With Tax Authorities
The transaction data maintained by Indian exchanges is regularly shared with the Income Tax Department. This includes details such as trading volumes, wallet addresses, and profit records. By comparing these details with tax returns, the department can easily identify users who have underreported income or failed to declare their crypto trades.
Monitoring Foreign Exchange and Wallet Transactions
Foreign wallets and overseas exchanges are no longer invisible to Indian tax authorities. Agreements like the Multilateral Competent Authority Agreement have ended the era of invisible offshore wallets. The government not only receives current data but may also demand retroactive reporting. This ensures foreign wallet holdings are visible, traceable, and subject to Indian tax rules.
OECD Crypto-Asset Reporting Framework (CARF)
India is preparing to adopt the OECD’s CARF, which enables automatic sharing of crypto-related data across countries. This means that transactions on foreign exchanges involving Indian residents will be reported back to Indian authorities. The framework eliminates anonymity and makes overseas trades transparent.
Common Reporting Standard (CRS)
India already participates in the CRS, which provides financial information about residents holding assets abroad. With CRS now extended to include digital assets, Indian taxpayers with overseas wallets can no longer assume privacy. These details are accessible to the Income Tax Department through international data-sharing agreements.
FEMA and LRS Oversight
Foreign transactions fall under the Foreign Exchange Management Act. Under the Liberalised Remittance Scheme, Indian residents can remit up to USD 2,50,000 annually. Transfers to foreign crypto exchanges must be declared under this framework. Misreporting or exceeding limits can trigger FEMA notices and invite additional scrutiny.
Use of AI, Data Analytics, and Cross-Verification
Starting 2025, the Income Tax Department now relies on advanced technology to track crypto trades. Artificial intelligence and big data tools allow real-time detection of mismatches and suspicious activity across multiple platforms.
AI-Powered Matching
Artificial intelligence is used to cross-check income tax returns against TDS filings, AIS, and Form 26AS. This automated system highlights mismatches instantly. Even small discrepancies in reported income and exchange records can trigger alerts for closer scrutiny and potential notices.
Non-Filer Monitoring System (NMS)
The department uses the Non-Filer Monitoring System to identify individuals who make large crypto transactions but do not file returns. Data from banks, UPI payments, and exchanges is cross-referenced, ensuring that individuals attempting to avoid tax compliance are quickly detected and flagged.
Project Insight
Project Insight is a large-scale data-driven initiative aimed at uncovering tax evasion. It analyses massive datasets, including financial and lifestyle data, to identify inconsistencies. For crypto investors, Project Insight ensures that any unexplained wealth or hidden trading activity becomes visible to tax authorities.
Real-Time Analysis
The combination of machine learning and data analytics allows the department to perform real-time checks on transactions. Sudden spikes in crypto trading volume, unusual withdrawals, or wallet transfers can be identified instantly. These tools make continuous monitoring of taxpayers possible with minimal human intervention.
Indirect Tracking Through Banks and UPI
Even when crypto trades are conducted outside exchanges, they can still be tracked indirectly. The Income Tax Department analyses banking activity and UPI transactions to identify unusual patterns linked to digital asset trades.
Bank Account Monitoring
High-value or frequent deposits and withdrawals that lack proper explanation are closely reviewed. If funds appear to originate from multiple individuals or sources, it may signal P2P crypto trading. Bank statements often provide the first evidence used by authorities to investigate undisclosed activity.
UPI-Based P2P Trades
UPI transfers may seem like personal payments, but large or repeated inflows are carefully examined. When UPI transactions are linked with P2P crypto trades, authorities can demand proof of legitimacy. This indirect tracking method ensures no digital trade goes unnoticed, even without centralised exchange involvement.
Search and Seizure Powers
In serious cases of suspected evasion, the department can initiate search and seizure operations under Section 131 (1A). These actions allow officials to confiscate devices, hardware wallets, or transaction records. By reconstructing activity from seized data, authorities can trace even hidden P2P or foreign-linked crypto transactions.
Enforcement Actions and Notices Issued
The Income Tax Department has moved beyond monitoring and now actively issues notices. These actions demonstrate the seriousness of compliance and the legal frameworks backing such investigations.
Notices to Non-Compliant Taxpayers
Thousands of taxpayers have already received notices for failing to declare crypto income. Many were identified through mismatches between TDS data and income tax returns. Such notices compel individuals to correct filings and disclose all crypto activity, reinforcing the department’s strict enforcement approach.
Nudge Programme
The CBDT uses its Non-Intrusive Usage of Data to Guide and Enable Taxpayers initiative, commonly known as the Nudge Programme. Under this scheme, taxpayers first receive emails asking them to review their filings. If discrepancies remain unresolved, stronger enforcement measures and official notices follow.
How Can KoinX Help With Tracking Crypto On Domestic and Foreign Exchanges?
Tracking crypto activity across Indian exchanges, foreign platforms, and self-custody wallets can be overwhelming for any investor. With the Income Tax Department now using AI, data analytics, and global data-sharing frameworks, even the smallest mismatch can lead to notices. KoinX helps you simplify this process by automatically consolidating all your transactions and preparing accurate tax-ready reports.
Seamless Integration Across Platforms
KoinX integrates with 800+ Indian and international exchanges, wallets, and blockchains. This ensures that no transaction, whether domestic or cross-border, goes unrecorded, giving you a single source of truth for compliance.
Accurate Tax Reports
The platform generates tax-compliant reports in line with Indian laws, covering Schedules VDA and FA. These reports are audit-ready and can be submitted directly as part of your income tax filings.
Error-Free Reconciliation
KoinX matches your crypto activity against Form 26AS and AIS data. This eliminates mismatches that often trigger notices, helping you respond confidently with records that align with official government data.
Expert Support for Complex Cases
Beyond automation, KoinX connects you with tax experts who specialise in crypto compliance. They guide you in handling notices, interpreting wallet transactions, and ensuring your responses meet regulatory expectations.
Do not wait for a tax notice to expose reporting gaps. Use KoinX today to simplify crypto tracking, generate accurate reports, and stay fully compliant with both domestic and foreign exchange rules.
Conclusion
The Income Tax Department now has a robust system to track crypto trades on both Indian and foreign exchanges. With TDS data, AI tools, and international agreements, undisclosed activity is quickly identified and acted upon. For investors, this means accurate reporting is no longer optional but a necessity.
Using a solution like KoinX ensures that every trade, wallet, and exchange is accounted for. Start using KoinX today to simplify compliance, prevent mismatches, and handle tax obligations with complete confidence.
Frequently Asked Questions
Can I Amend My Return If I Missed Reporting Crypto Trades?
Yes, you can file an updated return under Section 139(8A) to disclose missed crypto trades. This option allows you to correct past filings, though it must be done within the permitted timeline. Updated returns reduce the risk of penalties or escalated notices.
Are Gifts of Cryptocurrency Also Taxable in India?
Yes, crypto received as a gift may be taxed under the column “Income from Other Sources.” If the value exceeds INR 50,000, it becomes fully taxable, unless received from a relative or on specific occasions exempted by the law.
Do Airdrops and Staking Rewards Need to Be Reported?
Yes, both airdrops and staking rewards are considered taxable income at the time of receipt. The value is calculated at market price when credited. Reporting these earnings ensures transparency and helps prevent disputes with the tax authorities later.
Can NRIs Holding Crypto Abroad Face Indian Tax Notices?
Yes, if an NRI is still classified as a tax resident or has taxable income arising in India, undisclosed foreign crypto wallets can trigger notices. Compliance with Schedule FA is mandatory, even for holdings outside India.
Does GST Apply to Crypto Transactions in India?
Currently, GST may apply to services provided by crypto exchanges, such as trading fees or commissions. However, individuals trading crypto for personal investment are not directly charged GST on the asset itself. Taxpayers should still account for indirect costs while filing returns.
