If you have received a crypto tax notice recently, you are not alone. Many investors are facing the same situation as the Income Tax Department has become more active in tracking digital asset transactions. At first glance, the notice can feel intimidating, especially if you are unsure why it was sent or how to respond.
The reality is that crypto taxation in India is now stricter than ever. With a flat 30% tax on gains and a 1% TDS on transfers, the government is closely monitoring all transactions. Using advanced data tools, tax authorities compare information from exchanges, AIS, and Form 26AS to identify even minor discrepancies. The good news is that with the right approach, you can respond confidently and avoid penalties.
Why Are Crypto Tax Notices Issued?
Crypto tax notices are not random. They are issued when the Income Tax Department finds mismatches or inconsistencies between your declared income and the information already available in their system. Understanding the common reasons behind these notices can help you identify the issue and respond correctly.
Mismatch in AIS and Form 26AS
A frequent trigger for a notice is a discrepancy between your ITR and the records in AIS or Form 26AS. Exchanges report TDS details directly to the department. If your ITR does not reflect the same entries, the system automatically flags it. Even a small unreported transaction can lead to such a notice.
Incorrect Reporting in ITR
Another common reason is incorrect reporting. If you filed your return using the wrong form or did not declare crypto income in the right schedule, the department treats it as an error. For example, using ITR-1 when you have VDA income is not permitted and will result in an immediate notice.
High Value Transactions
Large deposits or withdrawals in your bank account that do not align with your declared income often invite a notice. The system marks these as high-value transactions, especially if they come from or go to crypto exchanges. If your return does not explain these movements, the department will demand clarification.
Failure to Deduct or Report TDS
The law requires a 1% TDS on VDA transactions under Section 194S. If an exchange does not deduct TDS, or if you conducted peer-to-peer transfers without reporting them, this becomes a compliance issue. The department uses exchange reports and bank records to catch such gaps, which then result in a notice.
Step-By-Step Guide to Responding to a Crypto Tax Notice
Responding to a crypto tax notice may seem complex, but breaking it down into manageable steps makes the process easier. The key is to act quickly, stay organised, and provide evidence-backed explanations for any discrepancies. Each step ensures your response is accurate and accepted by the Income Tax Department.
Step 1: Verify the Authenticity of the Notice
The very first step is to ensure the notice is genuine. Use the Authenticate Notice or Order feature on the Income Tax e-filing portal. Enter the Document Identification Number to check if it was issued officially. This prevents falling victim to fraudulent emails or fake letters pretending to be from the department.
Step 2: Understand the Reason for the Notice
Every notice clearly states the section of the Income Tax Act under which it has been issued. Read it carefully to understand the exact reason for which it was sent. Some common examples include:
- Section 143(1): Highlights mismatches between the ITR filed and data available with the department, such as AIS or Form 26AS.
- Section 139(9): Points to a defective return, usually due to using the wrong ITR form or missing mandatory details.
- Section 143(2): Indicates that your return has been selected for scrutiny, either limited to specific issues or as a complete assessment.
- Section 148: Relates to reassessment, often triggered when income has been under-reported or not disclosed in earlier filings.
Step 3: Gather Supporting Documents
Collecting the right documents is vital to building your reply. This includes your filed ITR, AIS, and Form 26AS from the portal. Also, download transaction reports from every crypto exchange and wallet you used, along with bank statements showing deposits or withdrawals. These records act as proof when explaining your position.
Step 4: Reconcile Data
Carefully compare your personal records with the entries in AIS and Form 26AS. This reconciliation helps identify where the mismatch occurred. For instance, if TDS was deducted by an exchange but not shown in your ITR, this comparison will highlight the gap. Resolving such differences ensures accuracy in your response.
Step 5: Draft and Submit the Response Online
All replies must be filed through the e-filing portal under the Pending Actions section. If the notice is correct, you can pay the demand or file an updated return using ITR-U. If you disagree, explain your reasons clearly, attach supporting documents, and submit them online within the given deadline.
Crypto Tax Notices Scenarios and How to Reply?
Crypto tax notices often arise from recurring situations faced by many taxpayers. Each scenario has its own reason and requires a specific way of replying. By knowing what triggered the notice and how to address it, you can resolve the issue effectively and prevent further penalties.
Salaried Employees with Crypto Income Mismatch
Many salaried employees face notices because their ITR does not include crypto income, even though the TDS deducted by exchanges is reflected in AIS and Form 26AS. The error usually happens when individuals use ITR-1 instead of ITR-2. This mismatch signals the department that income has not been reported correctly, leading to a notice.
How To Reply?
- Download AIS and Form 26AS to check TDS entries under Section 194S.
- Collect exchange transaction reports and calculate actual gains.
- File an updated return (ITR-U) using ITR-2 and include crypto income.
- Submit the corrected return through the portal, along with the supporting documents.
Read More: How Are Crypto Salary Taxed In India?
Responding to Demand Notices (Section 143(1))
A demand notice under Section 143(1) usually arises when there is a shortfall in declared tax or a mismatch in payment. This could be due to errors in calculation, not accounting for TDS, or failing to report specific crypto trades. The notice is an intimation of an outstanding tax demand that requires immediate attention.
How To Reply?
- Log in to the e-filing portal and open Response to Outstanding Demand.
- Choose one of three options: demand correct and unpaid, demand correct and already paid, or demand incorrect.
- If paid, upload the challan details and proof of payment.
- If incorrect, select Disagree and upload documents supporting your claim.
Notices for Joint Bank Accounts and High Value Transactions
Notices are often issued when high-value bank transactions linked to crypto exchanges are detected, but do not match the income declared in the ITR. Joint bank accounts add complexity because the entire amount is reported under all holders. This may cause a spouse or family member to receive a notice even if the funds were not theirs.
How To Reply?
- Review AIS and bank transaction details carefully.
- If the transaction belongs to another person, mark it as Information related to another PAN.
- Upload supporting bank statements to show the actual contributor of funds.
- Provide a written explanation clarifying the ownership of transactions.
Special Cases for NRIs
Non-resident Indians are liable for tax on all Indian-sourced income, including crypto. A common reason for notices is non-reporting of trades on Indian exchanges. Budget 2025 made the rules stricter by taxing undisclosed VDAs found in audits at 60 percent with no deductions. This has led to more NRIs being flagged for compliance issues.
How To Reply?
- Use ITR-2 or ITR-3 for reporting crypto income.
- Disclose all Indian-sourced crypto trades in the correct schedule.
- If required, file an updated return to include omitted income.
- Submit supporting transaction reports and exchange statements online.
Scrutiny Notices Under Section 143(2)
A scrutiny notice under Section 143(2) signals that your return has been selected for detailed examination. It may be limited scrutiny for a particular mismatch or complete scrutiny for all income sources. These notices often follow when earlier replies were unsatisfactory or when large discrepancies are detected.
How To Reply?
- Log in to the portal and access the notice under e-Proceedings.
- Review the queries listed by the department carefully.
- Collect all exchange reports, wallet details, and bank statements.
- Prepare a clear, and structured reply addressing each query.
- Upload documents and submit the response within the given time limit.
Consequences of Ignoring a Crypto Tax Notice
Many taxpayers assume that a crypto tax notice can be set aside or ignored, but this approach can lead to serious trouble. The Income Tax Department treats every notice as mandatory communication, and failing to respond only makes matters worse. The consequences range from monetary fines to legal action.
Initial Penalties and Fines
If you do not reply to a notice within the stipulated time, the first outcome is a monetary penalty. The law allows fines of up to INR 10,000 for failing to respond to the notice. These fines apply for each instance of non-compliance, so ignoring multiple notices can increase your burden quickly.
Best Judgement Assessment
When a taxpayer does not cooperate, the Assessing Officer can proceed with a best judgement assessment under Section 144. In this case, the officer calculates your tax liability based on available data without your input. Such assessments are often much higher than the actual liability and become binding once issued.
Heavy Penalties for Misreporting
If the department concludes that you under-reported or misreported your income, strict penalties follow. Under Section 270A, a penalty of 50 percent of the tax shortfall applies to under-reporting. In cases of misreporting, the penalty can reach 200% of the amount reported. These amounts are in addition to the unpaid taxes and accrued interest.
Risk of Prosecution
In serious cases, the department may start prosecution under Section 276C for wilful evasion. This step can result in significant fines and even imprisonment for up to five years. The department has also seized crypto wallets and devices during investigations, proving that enforcement can go beyond just digital data.
Best Practices to Avoid Future Crypto Tax Notices
The best way to handle crypto tax notices is to ensure they never arise in the first place. Following proactive compliance practices saves both time and stress. By keeping records up to date, reconciling official documents, and using the right resources, you can file your returns with confidence and accuracy.
Maintain Accurate Records
Every trade, transfer, or conversion involving crypto must be properly logged. Include details such as the date, type of asset, cost of purchase in INR, sale price, and any TDS deducted. Without such records, it becomes difficult to prove your position if a notice is issued. Accurate records serve as your first line of defence.
Regular Reconciliation with AIS and Form 26AS
Before filing your return, always review AIS and Form 26AS. These documents contain the Income Tax Department’s official record of your transactions. If you spot TDS credits or entries not included in your ITR, fix them before submission. Reconciling these forms with your personal transaction history ensures both sides reflect the same information.
Choose the Right ITR Form
Selecting the correct return form prevents defective return notices. Investors who treat crypto as capital gains should use ITR-2, while traders or those with business income from crypto should use ITR-3. Filing under the wrong form creates a mismatch, which the system quickly identifies and flags for correction.
Use Crypto Tax Software
Managing crypto taxes manually is often complex. Using reliable crypto tax software like KoinX simplifies the process by importing data directly from exchanges and wallets, generating compliant reports, and ensuring your filings match with AIS and Form 26AS. It allows investors to automate record keeping, classify transactions correctly, and generate tax-ready reports tailored for Indian regulations.
Get Professional Help When Needed
If you trade across multiple exchanges, engage in peer-to-peer transactions, or handle foreign platforms, expert guidance is invaluable. A qualified tax professional can check your calculations, prepare corrected returns, and draft formal replies to notices. Their knowledge ensures your compliance is accurate and helps avoid unnecessary penalties.
How Can KoinX Help With Crypto Tax Notices in India?
Getting a crypto tax notice often causes worry and doubt about what to do next. Many investors feel lost when they see mismatches in their AIS or Form 26AS, or when they are asked to justify trades across exchanges and wallets. In such cases, a simple mistake can lead to heavy penalties. KoinX makes this process easier by giving you clarity, accurate reports, and expert help so you can reply with confidence and avoid unnecessary legal or financial trouble.
Automated Data Import
KoinX connects with 800+ exchanges, wallets, and blockchains, making it easy to gather all your transaction history in one place. This automation reduces the chances of missing records when responding to a notice.
Accurate Reconciliation with ITD Records
The platform matches your transaction details with AIS and Form 26AS, helping you identify mismatches quickly. This ensures that your responses to notices are based on accurate reconciliation.
Ready-to-File Tax Reports
KoinX generates tax-ready reports that comply with Indian regulations. These reports can be used directly to reply to notices, making your response clear, professional, and backed by proper evidence.
Support for Correct ITR Filing
With specific guidance on selecting the right ITR form and reporting schedules, KoinX helps you avoid errors that lead to defective return notices. This prevents future issues while addressing current notices.
Expert Assistance
KoinX also provides access to tax experts who can review your situation, draft formal replies, and ensure your response aligns with legal requirements. This gives you additional confidence when replying to complex notices.
Do not let a crypto tax notice put your finances at risk. With KoinX, you can reconcile records, generate compliant reports, and get expert support in just a few clicks. Start using KoinX today and handle your notices with confidence.
Conclusion
Receiving a crypto tax notice does not have to cause panic. What matters is how quickly and accurately you respond. By verifying the notice, collecting the right documents, reconciling records, and submitting a clear reply, you can resolve the issue effectively. Proactive steps like keeping detailed logs and choosing the correct ITR form also help prevent future notices.
KoinX makes this entire process simple. From accurate reconciliation to expert-backed responses, it ensures you stay compliant. Get started with KoinX today and reply to tax notices with ease.
Frequently Asked Questions
What Is The Deadline To Respond To A Crypto Tax Notice?
The deadline is mentioned in the notice itself and is usually between 15 and 30 days. It is important to reply within this period to avoid penalties or further legal action. Missing the deadline can also trigger a best judgement assessment, which may increase your tax liability.
Can I Ask For An Extension To Reply To A Notice?
Yes, in some cases, you may request an extension, but it must be done formally through the e-filing portal. Approval depends on the assessing officer and is not guaranteed. Providing genuine reasons like medical emergencies or difficulty in collecting documents improves the chances of getting more time.
Are Crypto Airdrops Also Reported To The Income Tax Department?
Yes, airdrops received are treated as income at the time of receipt and may appear in your AIS if reported. Later, when you sell them, gains are taxed at 30 percent under Section 115BBH. Not reporting them in your return can lead to mismatches and potential notices.
What If I Did Not Trade But Only Transferred Crypto Between Wallets?
Transfers between personal wallets are not taxable, but you must keep records of them. If such transfers appear in your exchange reports or bank statements without proper notes, they may be mistaken for trades. Proper documentation avoids confusion and prevents unnecessary notices from the department.
Can A Tax Notice Be Issued For Old Crypto Transactions?
Yes, the department can issue notices for past transactions if they find mismatches or unreported income. Updated return provisions allow disclosures for up to two years from the end of the assessment year. Beyond that, reassessment notices may be issued if undisclosed income is identified during checks.
Do I Need A Chartered Accountant To Reply To A Notice?
You are not legally required to hire a Chartered Accountant to respond, but professional help can be valuable. If your transactions span multiple exchanges, involve foreign platforms, or include large sums, expert guidance ensures that your response is correct and well-supported, reducing risks of further penalties.
