The Wakefield driver was apprehended by licensing officers, who'd been tipped off that the weapon was in the back pocket of his seat while he drove passengers around.
When an enforcement team visited his home, the knuckleduster was visible from outside the driver's vehicle.
He later gave the brass weapon up after enquiries were made.
The driver, who has not been named by the council, could now have his licence revoked.
The revelation was made in a crime report by Councillor Maureen Cummings, portfolio holder for communities.
Coun Cummings said: "Over the Christmas period, licensing enforcement officers were made aware by the transport depot of a taxi driver possibly travelling around with a knuckleduster in the pocket of his seat.
"Licensing officers went out to the driver's address to see if we could see the weapon in the vehicle, which they did.
"The driver would not answer the door, but he later came to see them, and he handed over the brass knuckleduster where it was seized and taken to the police stores for safe keeping.
"The driver was later interviewed and will go before the licensing committee to receive his punishment."