India's Crypto Tax Framework: Time for a Calibrated Update
India introduced cryptocurrency taxation in 2022. The move came at a crucial moment. Digital assets were gaining rapid adoption across the country. However, global regulatory standards were still in a state of flux. The Union Budget of that year established clear rules. It imposed a flat 30 percent tax on income generated from virtual digital assets. Additionally, a 1 percent Tax Deducted at Source (TDS) was mandated on every transaction.
The government's intent was straightforward. It aimed to create a transparent trail for all crypto transactions. The framework sought to bring this emerging asset class under a defined fiscal structure. Three years have passed since that pivotal decision. Both the crypto ecosystem and India's regulatory environment have matured significantly.
The Impact of Stringent TDS on Market Dynamics
Today, India leads the world in crypto adoption. Global standards for compliance and oversight have also become clearer. In this evolved context, experts see an opportunity. They believe the current tax framework requires a review. The goal is to ensure it serves its original objectives while aligning with present-day realities.
The upcoming Union Budget presents a perfect moment for this recalibration. Many participants in the crypto space perceive the existing rules as relatively stringent. The impact of the 1 percent TDS serves as a prime example. For long-term investors, this deduction might seem manageable. However, the story is different for active traders and liquidity providers.
These market players often operate on razor-thin margins. For them, even a small deduction on every transaction can lock up capital. Strategies like market-making and arbitrage become difficult to sustain. These strategies typically function at margins between 0.01 and 0.05 percent per trade. The 1% TDS effectively makes them unviable on Indian platforms.
Industry data reveals a stark consequence. After TDS implementation in July 2022, trading volumes on domestic exchanges declined sharply. A massive shift of trading activity occurred. Between July 2022 and July 2023 alone, an estimated ₹3.5 lakh crore worth of Indian crypto trading moved offshore. Traders migrated to international platforms that did not deduct TDS.
Thinning Order Books and the Shift to Unregulated Channels
This exodus had a direct impact on market health. Reduced participation from liquidity providers led to thinner order books. A noticeable price discrepancy emerged. Indian platforms often started trading at a premium compared to global markets. While TDS aimed to enhance transparency, a significant portion of activity simply moved beyond India's immediate supervisory reach.
This activity shifted to peer-to-peer channels and overseas venues. Ironically, this move reduced transparency instead of increasing it. Users who migrated to these unregulated platforms face higher risks. Indian cybersecurity firms have flagged substantial losses. These losses are linked to misleading offshore platforms promoted aggressively on social media.
Keeping trading activity within India's regulated perimeter enables better oversight and user protection. The government has already taken strong enforcement actions. Survey actions under the Income Tax Act against global platforms catering to Indian users revealed non-compliance. Several crores in TDS went unreported, leaving end-users financially vulnerable.
A Strengthened Regulatory Foundation Supports Reform
Fortunately, India's regulatory framework has strengthened considerably since 2022. A key development occurred in March 2023. Virtual asset service providers were brought under the Prevention of Money Laundering Act (PMLA). These entities are now registered as reporting entities with the Financial Intelligence Unit-India (FIU-IND).
Robust know-your-customer norms are firmly in place. Systems for suspicious transaction reporting are operational. Authorities have taken action against non-compliant offshore exchanges. This means transaction monitoring no longer depends solely on the TDS mechanism. The high transaction-level TDS now acts primarily as a deterrent to onshore trading.
In this new environment, broadening the onshore tax base could be more effective. Encouraging activity back to regulated Indian platforms should be the priority. The numbers underscore the scale of the domestic market. In the 2024-25 financial year, the value of cryptocurrency transactions in India exceeded ₹51,000 crore. This figure is based on tax collection numbers of ₹511.8 crore.
Proposed Reforms: Lower TDS and Loss Set-Offs
Experts propose targeted adjustments to the tax framework. One major recommendation is to lower the TDS rate significantly. Reducing it to 0.01 percent would maintain a record of trading activities. Simultaneously, it would provide much-needed relief to users, especially active traders. This change alone could help restore liquidity and improve price discovery on Indian exchanges.
Another critical area for reform is the treatment of losses. The current framework creates an asymmetric tax structure. Losses from crypto transactions cannot be set off against gains. They also cannot be carried forward to future years. This rule applies even within the same asset class. It stands in contrast to the treatment of most other financial assets in India.
Allowing limited loss set-offs within the cryptocurrency asset class would correct this imbalance. It would align crypto taxation more closely with established principles of fair taxation. A combination of these two adjustments—lower TDS and permitted loss set-offs—would not dilute oversight. India's strong PMLA and FIU-IND reporting norms would continue to ensure enforcement.
Domestic exchanges have borne significant costs due to the current framework. Customer support and compliance expenses have increased. Platforms must align their security and reporting systems with stringent Indian regulations. Reforms would support these compliant service providers and help them compete effectively.
The Fiscal Imperative and the Path Forward
The fiscal argument for reform is compelling. According to analyses by the Tax India Online Knowledge Foundation, if policies remain unchanged, cumulative uncollected TDS could approach ₹40,000 crore over the next five years. This represents a massive revenue risk and leaves users vulnerable due to non-reportage on offshore platforms.
The upcoming Budget offers a strategic opportunity. Fine-tuning the crypto tax framework can achieve multiple objectives. It can support compliant domestic service providers. It can protect Indian users by bringing activity back to regulated venues. Most importantly, it can ensure India captures economic activity, innovation, and tax revenues domestically.
Such an approach is not a departure from regulatory prudence. It is a logical step forward. It acknowledges the maturity of India's digital asset ecosystem. A calibrated update can help the nation secure the full benefits of this fast-evolving technological frontier. The goal is clear: create a tax environment that fosters growth, ensures security, and maximizes revenue within India's borders.
