Bitcoin Self-Custody Versus Exchange Wallets: Risks and Indian Tax

Summary: The choice between self-custody and an exchange wallet determines who controls the private keys required to transfer Bitcoin and who bears responsibility for recovering access after a security incident. In a self-custody arrangement, the owner ordinarily controls the signing credentials; in a custodial exchange account, the service provider generally controls the relevant keys and processes withdrawal requests. Neither model eliminates risk. Self-custody requires protection against lost recovery phrases, compromised devices, phishing and irreversible transfers, while exchange custody introduces counterparty, operational, withdrawal and insolvency risks. Users should distinguish a genuine on-chain withdrawal from an internal exchange ledger transfer, test recovery arrangements without exposing secrets, and maintain transaction records showing addresses, hashes, timestamps, fees and beneficial ownership.

First reported by Tax Guru. This page is a short excerpt; the full text is theirs.