The Income Tax Department has tightened its leash on peer-to-peer (P2P) crypto trades and foreign wallet transactions. With stronger monitoring tools and global data-sharing frameworks in place, activities that once seemed private are now visible to authorities.
P2P crypto trades often trigger notices due to weak audit trails, requiring UPI proofs, correspondence, and fund sources to establish legitimacy. Foreign wallet notices highlight government access to offshore holdings under CARF and MCAA, demanding proactive disclosure in ITR with Schedule FA to avoid FEMA or PMLA penalties and compliance risks.
If you have received such a notice, the key is not to panic but to act methodically. This article explains the step-by-step process to verify, understand, and respond to notices linked with P2P and foreign wallet transactions, helping you stay compliant and protect yourself from penalties.
I. Verify the Authenticity of the Notice
It is important to first ensure that the notice you received is genuine. Verification prevents falling prey to scams and helps you focus only on legitimate communication.
DIN Authentication Process
Every official Income Tax Department notice includes a unique Document Identification Number (DIN). This number can be verified on the official income tax e-filing portal. You need to enter the DIN along with your PAN, mobile number, and date of issue. If the portal confirms the details, you can proceed confidently knowing that the notice is valid.
Invalid Notices
If a notice does not include a DIN or fails verification on the portal, it has no legal standing. Such communication should not be acted upon under any circumstances. Instead, it must be reported immediately. Recognising an invalid notice protects you from scams and ensures that only lawful correspondence shapes your next steps.
II. Identify the Issuing Authority
Once you confirm the notice is genuine, the next step is to know which authority has issued it. Each body has different powers, responsibilities, and consequences.
Income Tax Department (ITD)
The ITD is the most common issuer of notices related to P2P and foreign wallet transactions. Its role is usually linked to mismatches in ITR data, non-filing of Schedule VDA or FA, or unexplained inflows in bank accounts. An ITD notice can range from a simple adjustment request to a serious allegation of underreporting or escaping income assessment.
Enforcement Directorate (ED)
The ED handles cases that go beyond simple tax mismatches. Its notices usually relate to violations under FEMA or PMLA, particularly involving foreign remittances or suspicion of money laundering. These notices carry higher risks since they can lead to asset seizures, investigations, or even criminal proceedings. Responding properly to ED notices requires detailed documentation and legal support.
Financial Intelligence Unit - India (FIU-IND)
The FIU-IND focuses on suspicious transactions flagged by reporting entities such as banks or crypto exchanges. It monitors high-value or unusual transfers that could indicate illegal activity. A notice from FIU-IND indicates that your activity has raised concerns under anti-money laundering regulations. Responding to such notices requires transparency and clear evidence proving the legitimacy of your financial activities.
III. Understand the Legal Framework of the Notice
Every notice for P2P or foreign wallet transactions is backed by specific laws. Understanding which framework applies helps you know the seriousness and prepare the right response.
Income Tax Act
Notices from the ITD usually point to non-compliance with income reporting rules. These can be issued under:
- Section 133(6): For information requests where officials demand details of transactions, including P2P trades or foreign wallet transfers.
- Section 139(9): For defective returns where schedules like VDA or FA are missing.
- Section 143(1)(a): For adjustments linked to mismatched ITR and TDS data.
- Section 148: For cases where income is believed to have escaped assessment.
Such notices require you to justify discrepancies and may lead to reassessment if ignored.
Foreign Exchange Management Act (FEMA)
FEMA governs all cross-border transactions. If you used foreign wallets or sent money to overseas exchanges, your activity falls under this law.
The Enforcement Directorate monitors transfers under the Liberalised Remittance Scheme, which limits remittances to USD 2,50,000 annually. Any excess or misreported transfers can lead to FEMA-related notices. These are civil in nature but carry significant financial penalties.
Prevention of Money Laundering Act (PMLA)
PMLA is the most serious framework since it treats violations as criminal offences. Once a notice is issued under this law, the burden of proof shifts to you. You must demonstrate that funds were legitimate and not linked to illegal activity. Penalties can include asset seizures, confiscation of wallets, and imprisonment ranging from three to seven years.
IV. Prepare Documentation and Evidence
A strong response depends on how well you present your documents. Collecting accurate records ensures that your reply is credible and minimises the risk of further investigation.
Bank Statements
Provide statements for all bank accounts linked with your crypto activities, ideally for at least the last five years. These help trace inflows and outflows, such as payments for P2P purchases or deposits sent to foreign exchanges. A clear record of on-ramps and off-ramps supports the legitimacy of your transactions and builds transparency.
Crypto Exchange Statements
Download complete transaction histories from every exchange you have used, both Indian and foreign. These should include trade reports, deposit and withdrawal logs, and linked wallet details. Presenting consolidated data helps tax authorities verify that your reported gains or losses align with actual activity across exchanges and wallets.
On-Chain Sata for Wallets
If you use self-custody wallets, maintain on-chain records of all transactions. Public wallet addresses, transaction IDs, and blockchain logs provide an audit trail to justify transfers. These records are vital for proving ownership and linking funds to legitimate activities, especially when dealing with foreign wallet notices.
P2P Specific Proof
P2P trades often lack the formal records of centralised exchanges. To address this, maintain:
- UPI transaction confirmations.
- Chat or email correspondence with counterparties.
- Proof of the source of funds for each trade.
These details help you establish that the transfers were genuine crypto trades, not loans or gifts.
ITR and Form 26AS
Keep copies of past income tax returns, particularly those including Schedule VDA and Schedule FA. Alongside this, Form 26AS provides a summary of TDS deducted and helps reconcile reported income with third-party records. Together, these documents ensure consistency and demonstrate that you are not hiding any taxable gains.
V. Respond Through the E-Filing Portal
Once your documents are ready, you must submit a formal reply through the official e-filing portal. Following the correct steps ensures your response is timely and properly recorded.
Step 1: Login to Portal
Visit the Income Tax Department’s e-filing portal and log in using your PAN as the user ID along with your password. Ensure you also have access to the registered mobile number for OTP verification.
Step 2: Navigate to E-Proceedings
On the dashboard, select the option Pending Actions, then click e-Proceedings. This section contains all pending notices and is the central hub for online responses.
Step 3: View and Download the Notice
Select the notice you want to address and click View Notice. Download the document and carefully read its details, including deadlines and specific requirements.
Step 4: Submit Response
Click Submit Response to begin drafting your reply. Options may vary depending on the notice type. For example, you may need to agree to rectify a return or provide an explanation for a mismatch.
Step 5: Provide a Detailed Explanation
Write a clear and structured response that directly addresses the notice. Reference supporting documents and explain any discrepancies, such as P2P transactions or foreign wallet transfers, with proof.
Step 6: Upload Supporting Documents
Attach all relevant files, such as bank statements, exchange reports, or UPI receipts. Each file must meet the technical size and format requirements of the portal.
Step 7: Final Submission and Acknowledgement
Once satisfied with your response, click submit. A success message will appear along with a Transaction ID. Save the acknowledgement and confirmation email for your records.
VI. Do Not Ignore The Notices
Failing to respond to notices for P2P or foreign wallet transactions can have serious consequences. These range from monetary penalties to criminal prosecution, depending on the authority and legal framework involved.
Framework | Consequences | Impact on Crypto Investors |
Income Tax Act | Late fees under Section 234F, penalties up to 200% under Section 270A, and interest on unpaid taxes. | Non-disclosure of crypto gains or missing Schedules VDA/FA increases chances of reassessment. |
FEMA | Significant fines for misreporting or exceeding LRS limits on foreign transactions. | Overseas wallet holdings and undeclared remittances face closer scrutiny and repeated penalties. |
PMLA | Seizure of crypto wallets, confiscation of assets, imprisonment | It can deplete all their cryptocurrency investments |
How Can KoinX Help With P2P or Foreign Wallet Transaction Notices?
Notices for P2P trades and foreign wallet transactions are among the most complicated to handle. They require detailed records, legal compliance, and accurate reporting across multiple platforms. Missing details or late responses can result in penalties or escalated scrutiny. This is where KoinX provides the ideal solution. With its seamless integrations and compliance-focused features, KoinX ensures that every transaction is accounted for and reported correctly.
Automated Transaction Tracking
KoinX automatically syncs with 800+ exchanges, wallets, and blockchains, consolidating your entire crypto activity into one platform. This ensures no P2P or foreign wallet trade is missed, helping you respond confidently to notices with complete records.
Audit-Ready Tax Reports
The platform generates accurate, tax-compliant reports tailored for Indian laws, including Schedules VDA and FA. These reports simplify your submissions, making it easier to present data that aligns with income tax requirements.
Error-Free Reconciliation
With automated reconciliation, KoinX helps match your crypto records against Form 26AS and AIS data. This eliminates mismatches that often trigger notices, ensuring consistency and reducing the chance of reassessment.
Expert Guidance for Notice Responses
KoinX connects you with crypto tax professionals who understand complex P2P and foreign wallet cases. They guide you through drafting precise replies and ensure your documentation meets the required standards.
Do not let a tax notice catch you off guard. Use KoinX to simplify reporting, generate accurate crypto tax reports, and stay fully compliant. Start with KoinX today and handle notices with confidence.
Conclusion
Notices for P2P and foreign wallet transactions highlight how closely crypto activity is now monitored. They can feel daunting, but a clear strategy that starts with verification, careful documentation, and timely responses makes compliance achievable.
KoinX makes this process far easier by consolidating your records, generating audit-ready reports, and providing expert-backed guidance. Start using KoinX today to simplify your crypto tax reporting, respond confidently to notices, and stay ahead of regulatory requirements.
Frequently Asked Questions
What Should I Do Immediately After Receiving a Notice?
The first step is to stay calm and carefully read the notice. Identify the authority, check the deadline, and begin collecting relevant records. Avoid rushing a response without preparation. Consulting a tax expert early can help shape a structured and compliant reply.
Can P2P Transactions Be Easily Tracked By Authorities?
Yes, even though P2P trades lack formal exchange records, authorities can trace them through UPI confirmations, bank trails, and data reported by counterparties. These transactions are increasingly flagged during compliance checks, especially when high-value transfers do not align with declared income.
Do I Need To Disclose Foreign Wallets Even If I Do Not Trade Frequently?
Yes, any foreign wallet holding must be declared in Schedule FA of your ITR, regardless of trade frequency. Non-disclosure can invite penalties under FEMA or scrutiny under PMLA. Being transparent ensures smoother compliance and avoids unnecessary legal complications later.
How Much Time Do I Get To Respond To Such Notices?
The response period depends on the type of notice and issuing authority. Generally, taxpayers are given 15 to 30 days. The exact timeline is always mentioned in the notice. Missing the deadline can result in penalties or escalation to stricter proceedings.
