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A crypto tax notice in India in April 2026 looks very different from one in 2022. The Income Tax Department now issues Section 148A reopening notices to VDA traders routinely, driven by AIS and TIS data that cross-references exchange-reported TDS, bank statements, Foreign Exchange Management Act disclosures, and Insight portal analytics. Some of these notices are technically accurate; many over-read the data, treating gross turnover as income and producing demand figures a taxpayer cannot reconcile to actual profit. A small number trigger the block-assessment machinery at 60 per cent under Chapter XIV-B. This third article in the series walks through the enforcement architecture, the categories of notice a VDA taxpayer is most likely to see, the typical drafting errors on the Department’s side that create over-demand problems, and the framework a taxpayer should use to respond under the current regime. Part One addressed the substantive tax framework; Part Two addressed the parallel reporting regime under Section 509 and CARF; this final article is about the enforcement reality that both produce.
Key Takeaways
- Section 148A of the Income-tax Act provides for a show-cause notice before reopening an assessment for escaped income; the Department now issues these notices in significant volume to crypto traders for financial years 2021-22 onward, particularly where AIS data diverges from ITR disclosures.
- Block-assessment provisions under Chapter XIV-B of the Act, read with Section 158B, can tax undisclosed VDA income at 60 per cent where a search or requisition establishes concealment; the Finance Act, 2025 amendments strengthen this regime.
- A recurring drafting error in VDA notices is treating gross transaction turnover as taxable income rather than computing profit on a transaction-by-transaction basis; a trader with INR 1.6 crore turnover and INR 4-5 lakh actual profit can receive a demand based on the turnover figure.
- P2P traders on offshore exchanges face elevated risk where counterparty KYC is incomplete — the entire sum received can be classified as unexplained credit under Section 68, regardless of actual profit.
- The Binance data-sharing arrangement post-registration has placed more than 400 Indian users under tax audit by March 2026; the same template will apply to every offshore exchange registered with FIU-IND and, from April 2027, to every CARF-participating foreign jurisdiction.
- The taxpayer-response framework rests on Section 139(8A) updated returns (where open), Section 148A(b) objections, compounding applications, and — for genuine cases — proper computation of net income rather than acceptance of gross-turnover-as-income framings.
The Section 148A Reopening Mechanism
Section 148A of the Income-tax Act, inserted with effect from 1 April 2021, governs the procedure for reopening an assessment where the Assessing Officer has information suggesting that income chargeable to tax has escaped assessment. Before a reassessment notice under Section 148 can issue, the Officer must conduct an inquiry under Section 148A(a), provide the taxpayer with a show-cause notice under Section 148A(b) setting out the information relied on and calling for the taxpayer’s reply within a period of seven to thirty days, consider the reply under Section 148A(c), and pass a reasoned order under Section 148A(d) deciding whether reopening is warranted. The Supreme Court’s judgment in Union of India v. Ashish Agarwal (2022) affirmed the procedural rigor of this framework.
For VDA taxpayers, the triggers driving Section 148A notices are now largely data-driven. The Insight portal cross-references PAN-linked information across multiple sources: TDS filings under Form 26AS, exchange-reported VDA TDS, bank credits visible to the Department through SFT and CIB data, foreign asset disclosures under Schedule FA, property registration records, and high-value transaction reports. Where the aggregate of these data points suggests a taxpayer has conducted VDA activity not reflected in the ITR, the system generates a risk flag that escalates through the Non-Filer Monitoring System and into a Section 148A(a) inquiry. Tax consultancy KoinX reported on 6 April 2026 that Section 148A notices are now being issued across India with many tied to FY 2021-22 transactions, which is the earliest year for which VDA-specific TDS data is available.
Block Assessment Risk Under Chapter XIV-B
The more consequential enforcement risk, for traders whose conduct has crossed into material non-disclosure, is Chapter XIV-B of the Income-tax Act — the block-assessment regime. Where a search under Section 132 or a requisition under Section 132A yields undisclosed income, the Department assesses that income across a block period (typically the year of search plus the preceding six assessment years) and taxes it at 60 per cent under Section 158BA. The Finance Act, 2025 introduced amendments strengthening this regime for undisclosed VDA income in particular, and published commentary suggests a 60 per cent tax rate applies to unreported crypto gains from 1 February 2025 onward, pending final enactment of the relevant Finance Bill provisions.
The reach of Chapter XIV-B is wide. For taxpayers, the practical concern is that VDA holdings held offshore or through unidentified wallets can be classified as undisclosed assets, with the burden of proof on the assessee to establish legitimate acquisition. Block-period taxation at 60 per cent is not further reducible by surcharge and cess calibrations — the rate is punitive by design, and the difference between honest-disclosure taxation at 30 per cent and block-assessment taxation at 60 per cent is exactly the gap the Department intends to make visible as a deterrent. For a trader with an undisclosed INR 1 crore VDA gain, the arithmetic is stark: INR 30 lakh in tax if declared, INR 60 lakh in tax if recovered through Chapter XIV-B, plus penalty and interest under Sections 234A to 234C. The Binance-audit cohort of 400-plus Indian users is the empirical expression of this risk; for taxpayers with similar offshore exposure, the Chapter XIV-B path is live.
The Gross-Turnover-as-Income Problem
The single most consistent drafting error in VDA enforcement notices — and the issue most often costing taxpayers more than the true liability would warrant — is the treatment of gross transaction turnover as income. AIS and TIS reflect transaction values as reported by exchanges under Form 26QF and Section 194S filings. Where a taxpayer has conducted INR 1.6 crore of turnover through a combination of spot buys, spot sells, and crypto-to-crypto swaps, the aggregate transaction value visible to the Department is INR 1.6 crore — but the taxable income is not INR 1.6 crore. It is the net of sale consideration over cost of acquisition, computed transaction by transaction, and for most active traders falls within INR 4 lakh to INR 15 lakh of actual profit. A trader with this fact pattern who receives a Section 148A notice premised on INR 1.6 crore escaped income faces a demand orders of magnitude larger than the law actually supports.
The KoinX analysis of April 2026 audit data surfaces this pattern clearly: one P2P trader was served a penalty of INR 78,000 on a true profit of INR 1,500 because the counterparty PAN on a Binance P2P transaction was missing, and the Department treated the entire received sum as unexplained cash credit under Section 68. Multi-exchange and multi-wallet activity compounds the problem. A taxpayer moving VDAs between a Binance wallet, a Coinbase wallet, a self-custody MetaMask wallet, and an Indian exchange may show four sets of deposit-withdrawal data in AIS that sum to a large apparent figure, but represent the same coins moving through wallets rather than incremental profit. The response framework for a taxpayer in this position is to reconstruct the transaction chain with source documents — exchange CSVs, wallet histories, on-chain hashes — and demonstrate net profit computation to the Assessing Officer under Section 148A(b). This is a document-intensive reply, not a cursory one.
P2P Trades and Section 68 Unexplained Credit Risk
Peer-to-peer VDA transactions carry a distinctive enforcement risk under Section 68 of the Income-tax Act, the unexplained-cash-credit provision. Where a taxpayer receives a credit in the books — or, in the VDA context, an INR inflow linked to a P2P sell transaction — and fails to satisfy the Assessing Officer as to the identity and creditworthiness of the counterparty and the genuineness of the transaction, the entire credit can be added to income and taxed under Section 115BBE at 60 per cent plus surcharge. The threshold for the Department is not whether the taxpayer made a profit but whether the taxpayer can document the source of the funds.
For traders operating through Binance P2P, KuCoin P2P, or other offshore platforms that allowed P2P settlement prior to registration with FIU-IND, the documentation gap is often severe. Counterparty PAN is frequently unavailable, bank transfer remittance advice may be in a counterparty’s name the taxpayer never verified, and exchange records are owned by the offshore platform and not routinely retained by the trader. Under Section 68 and Section 115BBE, this documentation gap converts what would ordinarily be a modest Section 115BBH 30 per cent charge into a 60 per cent unexplained-credit charge on the entire inflow. The defence — where available — is to produce counterparty KYC, exchange transaction records, wallet transfer hashes, and bank remittance evidence, and to position the transaction within the Section 115BBH framework rather than the Section 68 framework. The earlier in the proceeding this defence is built, the better.
The Insight Portal, NMS, and Blockchain Analytics Tech Stack
The enforcement capacity behind VDA tax notices in 2026 is materially different from what it was in 2022. The Income Tax Department’s Insight portal integrates PAN-linked data from Form 26AS, AIS, SFT filings, bank transaction reports, GST filings, and increasingly from Section 509 reporting-entity submissions. The Non-Filer Monitoring System surfaces returns that look inconsistent with third-party-reported data. The Department’s officers have been trained, through a partnership with the National Forensic Science University at Goa, in blockchain analytics, digital forensics, and crypto wallet tracing. From 1 April 2026, tax investigations have also been empowered to access digital application logs and to inspect crypto wallets during income tax raids under the expanded digital-access provisions of the new Act.
The consequence is that the informational asymmetry that once allowed undisclosed VDA positions to remain invisible has materially narrowed. Government revenue from crypto tax was INR 269 crore in FY 2022-23 and INR 437 crore in FY 2023-24; the trajectory through FY 2025-26 is expected to be sharply higher as Section 509 data begins to flow, AIS matches tighten, and the Insight portal’s cross-referencing becomes increasingly granular. Taxpayers who have relied on the fragmentation of data across multiple exchanges and wallets to keep positions out of view should not assume that fragmentation survives another financial year. The rational planning assumption is that the Department can see, and will see, what a taxpayer held on every exchange the taxpayer used — domestic and, progressively, offshore.
Responding to a Section 148A Notice: The Framework
A Section 148A(b) show-cause notice is not a final assessment. It is an opportunity to explain why the Department’s information does not warrant reopening the completed assessment or — where the information does suggest escaped income — to propose the correct quantum. The first step on receipt is to read the annexed information carefully: the Department is required to share the specific information relied on, and the form of that information dictates the structure of the reply. Where the information is exchange-reported TDS, the reply reconciles exchange CSVs with the ITR Schedule VDA. Where the information is bank-credit data, the reply traces the source of the credits to legitimate VDA sale consideration, inheritance, or other explained income.
Where the taxpayer genuinely has undisclosed VDA income for a year still within the updated-return window (presently three years from the end of the relevant assessment year under Section 139(8A)), filing an updated return with additional tax under Section 140B may be the most efficient path, subject to specified caps on additional tax. Where the year is closed to updated-return filing, the response shifts to a reasoned Section 148A(b) objection that accepts the escaped income position, proposes the correct quantum (net profit, not gross turnover), and addresses penalty and interest mitigation under Sections 270AA (immunity from penalty on specified terms), 273B, and 273A. Compounding applications under Section 276CC and related provisions may also be available for prosecution-risk management. For offshore P2P exposure with Section 68 implications, early engagement with counsel is essential — the framing of the reply at the Section 148A stage materially shapes the assessment order that follows.
Looking Ahead
The enforcement trajectory through FY 2026-27 is in one direction only. The Section 509 reporting mechanism has begun feeding exchange data into the Department’s analytics stack. The Rules 114F-114H amendments have brought crypto accounts within FATCA and CRS reporting. The CARF MCAA signature, expected in 2026, will add international peer-jurisdiction data feeds from April 2027. The Insight portal will consume this data and surface mismatches with increasing speed. Section 148A notices for older assessment years are likely to accelerate as the limitation period for AY 2022-23 approaches closure. Block-assessment actions against cases with serious concealment will likely rise from isolated examples to a steady cadence.
For taxpayers, the practical lesson is that the enforcement window for voluntary correction is the shortest it has ever been. An updated return filed this quarter, on terms that reflect full disclosure of domestic and offshore VDA positions, materially reduces both the quantum of demand and the exposure to penalty and prosecution — compared to the same position surfaced post-notice in twelve months. For practitioners advising clients, the consolidated disclosure exercise across Schedule VDA, Schedule FA, and Form 61A cross-checks is the single most productive use of the current Q1 FY 2026-27 window. The regime as configured rewards early, complete, documented disclosure and punishes fragmentation and delay. The Department is not going to slow down, and neither should the compliance response.
Frequently Asked Questions
What is a Section 148A notice for crypto transactions?
Section 148A of the Income-tax Act requires the Assessing Officer to issue a show-cause notice before reopening an assessment for escaped income. For crypto traders, the Department now issues such notices based on AIS and TIS data that cross-references exchange-reported TDS, bank credits, and other third-party information. The taxpayer has seven to thirty days to respond under Section 148A(b), and the Officer must pass a reasoned order under Section 148A(d) before any reassessment notice under Section 148 can issue.
Can crypto income be taxed at 60 per cent under block assessment?
Yes, where the income is classified as undisclosed and falls within Chapter XIV-B of the Income-tax Act. Following a search under Section 132 or requisition under Section 132A, undisclosed income is assessed across a block period and taxed at 60 per cent under Section 158BA, without concessional rates. The Finance Act, 2025 amendments specifically targeted unreported crypto gains for this treatment. The 60 per cent rate is substantially higher than the 30 per cent ordinary rate under Section 115BBH, which is the rate that applies to disclosed VDA income.
Why is gross turnover being treated as income in crypto tax notices?
This is a recurring drafting issue in VDA enforcement. AIS reflects transaction values rather than profits, and the Department sometimes reads the aggregate figure as escaped income rather than as turnover against which cost of acquisition must be deducted. The correct position under Section 115BBH is that taxable income is the net of sale consideration over cost of acquisition, computed transaction by transaction. A taxpayer faced with a turnover-based demand should respond under Section 148A(b) with a reconstruction of actual profit supported by exchange CSVs, wallet histories, and bank records.
What is the risk for Indian users of Binance and other offshore exchanges?
Offshore exchanges that have registered with FIU-IND under the PMLA typically share user data with Indian authorities. Binance’s registration in August 2024 and subsequent data-sharing led to more than 400 Indian users being placed under tax audit by March 2026. For users with undisclosed positions on offshore platforms, the audit risk is immediate domestically and will extend internationally once CARF exchanges commence in April 2027. Peer-to-peer transactions without verified counterparty KYC carry additional risk under Section 68 as unexplained cash credits taxable at 60 per cent.
Can I file an updated return to disclose missed crypto income?
Yes, under Section 139(8A) of the Income-tax Act, an updated return can be filed within the prescribed period from the end of the relevant assessment year, subject to payment of additional tax under Section 140B. For FY 2021-22 (AY 2022-23), the window is presently open until the limitation under Section 139(8A) closes, subject to specified caps. Filing an updated return before a Section 148A notice issues materially reduces both the quantum of demand and the penalty exposure compared to post-notice response. This is the most efficient compliance cleanup mechanism available to taxpayers with previously undisclosed VDA positions.
This analysis was prepared by the Candour Legal Team. Candour Legal is a full-service Indian law firm with offices in Ahmedabad, Delhi, and Mumbai, publishing commentary on digital assets, financial regulation, and cross-border compliance at candourlegal.com.
Further reading in this series
- Part 1 — VDA Taxation in India: The 30% Flat Rate, 1% TDS, and the Income-tax Act 2025 Transition
- Part 2 — Section 509 Crypto Reporting from April 2026 and India’s Path to the OECD CARF
- After FIU-IND Registration: Ongoing AML Compliance and Enforcement Lessons from Binance and Bybit — on the parallel PMLA enforcement architecture that runs alongside the income-tax enforcement regime.
