A tax evasion investigation by India’s Income Tax Department found that Indian cryptocurrency exchanges are exploiting users’ tokens. They are using client assets deposited with them for their own purposes, without sharing the profits with the clients.
According to a report by The Times of India on August 30, most exchanges state in their terms and conditions that users’ tokens can be used as per the exchange’s discretion, which includes lending and trading, while users’ rights are limited to only selling the tokens. To boost liquidity and increase profits, these exchanges often lend cryptocurrencies to other users and pool them for staking without telling the original holder. This risky practice is called rehypothecation and commingling.
One such example is the bankruptcy of Bahamas-based cryptocurrency exchange FTX, in 2022. The department has detected many similar activities, but an absence of clear legal framework poses challenges to taking action.
“While individuals are evading taxes on profits, a bigger concern is that exchanges are trading the cryptocurrency parked with them,” a source told the newspaper, “and the profits are not shared with the individuals. There is no safety and no guarantee for the assets.”
Earlier, the tax department reported many cryptocurrency-related tax evasion cases.
In the Income Tax Bill 2025, which succeeded the Income Tax Bill 1961, the government stated that undeclared crypto could be considered tax evasion, and profits from undeclared NFTs, as well as crypto trading, would be taxable. Further, it stated, non-compliance and false tax claims related to cryptocurrency could result in penalties.
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