Decoding crypto tax notices: Expert explains different notice types, penalties, how taxpayers should respond

With the Income Tax Department relying more on automated and data-driven checks, crypto investors are increasingly receiving tax notices, often for compliance gaps they did not know existed.

Here are different types of crypto tax notices, the consequences of non-compliance and the right way to respond.

Different types of crypto tax notices

Punit Agarwal, Founder and CEO of KoinX, shares that “crypto notices don’t follow a single fixed sequence.”

A Section 143(1) intimation is issued automatically after an ITR is processed and usually flags a TDS or Schedule VDA mismatch against Form 26AS or AIS.

A Section 139(9) defective return notice, a Section 142(1) inquiry or a Section 133(6) request for wallet and exchange records can each be triggered independently, by different checks run at different points.

Agarwal explained that “One notice does not automatically lead to another. However, if investors fail to respond, it can result in reassessment under Sections 148A and 148, scrutiny or best judgment assessment under Sections 143(3) or 144, and eventually a tax demand under Section 156.”

FY 2021-22 remains focus of latest crypto tax notices

According to Agarwal, the current wave of crypto tax notices is largely centred on FY 2021-22, the financial year immediately before crypto-specific tax rules took effect in FY 2022-23.

“The most active wave right now involves Section 148A show-cause notices tied specifically to FY 2021-22,” he said.

These notices are generated by the Income Tax Department’s Insight Portal and Compliance Risk Information Unit (CRIU), which cross-checks PAN-linked KYC details, exchange data and bank transactions against the income reported in tax returns.

“A recurring issue is that these notices sometimes reflect an investor’s gross transaction value rather than their actual taxable gain, which inflates the apparent income significantly,” Agarwal said.

He said that reconciling turnover against actual gains, transaction by transaction, can help investors avoid tax demands.

Certain crypto tax lapses can lead to stricter action

Agarwal highlights the two key provisions that catch crypto investors more often than most expect.

• Sections 269SS and 269T: Prohibit accepting or repaying loans or deposits of ₹20,000 or more in cash, including certain P2P crypto transactions settled outside banking channels. Violations can attract a penalty equal to 100% of the cash amount involved.
• Section 276B: Applies when an exchange or P2P buyer deducts the 1% TDS under Section 194S but fails to deposit it with the government. Such defaults can lead to criminal prosecution, not just monetary penalties.

Agarwal said, “Cash settlements and delayed TDS deposits are both avoidable, but investors often don’t realise they carry this kind of exposure until a notice arrives.”

Responding correctly to crypto tax notice is crucial

Agarwal emphasised that investors should first identify the section under which the notice has been issued, as it determines the response timeline and the documents required.

“Investors should gather their AIS, Form 26AS, and complete transaction records from every exchange and wallet used, and reconcile them with the details reported in their tax return,” he said.

He added that where a genuine discrepancy exists, filing a corrected response or an updated return, wherever permitted within the prescribed deadline, can resolve many cases before they escalate further.