Once disregarded as a random experiment, the cryptocurrency market has reshaped the narrative around money and finance. From peer-to-peer Bitcoin innovation to the multi-trillion-dollar ecosystem of Virtual Digital Assets (VDAs), the legal-regulatory evolution of decentralised ledger technology is as interesting as its emergence. In the context of India, the approach towards VDAs has been non-linear and cautious. The Reserve Bank of India first issued a risk advisory in 2013, warning users of fraudulent activities, thus disregarding crypto. The action was further calibrated in 2018 by prohibiting regulated entities (banks, NBFCs) from dealing with crypto businesses; however, the Supreme Court, in its 2020 judgment (Internet and Mobile Association of India vs RBI), overturned the RBI circular by flagging the ban as disproportionate.
A major decisive shift came with the Union Budget 2022, when a dedicated tax framework for VDAs was introduced with two major objectives—first, to bring a fast-growing asset class within the tax net; and second, to create transaction-level traceability in an anonymous ecosystem. Four years later, there is a fundamental question: how effectively has the policy expanded the tax base? This question embodies greater significance in the realm of India’s participation in the global crypto economy, wherein the projected domestic market growth is over 18% annually.
The framework
The tax architecture rests on three pillars. First, income from VDAs is taxed at a flat 30% rate, regardless of the holding period or income slab. Second, every transaction above a low threshold attracts a 1% Tax Deducted at Source (TDS). Third, losses from one crypto asset cannot be set off against gains from another nor carried forward.
A concern related to the same is that the TDS is levied on gross transaction value, not on net profits, implying that in a market characterised by frequent buying and selling, it creates a situation of working capital drain. For instance, if a trader earns Rs 100 on one token and loses Rs 100 on another, there is still a tax payment of Rs 30 on the profitable leg, irrespective of having no net income. This design has proved punitive for high-frequency traders, whose margins depend on volume and liquidity.
As per an estimate, between February and October 2022 (immediately after the new tax rules came into effect), Indian exchanges lost trading volumes worth $3.8 billion to offshore platforms.
What followed was not a retreat from crypto trading but a change in the nature of the platform, as between July 2022 and 2023, around 3-5 million Indian users shifted to foreign exchanges such as Binance and KuCoin. Moreover, it is expected that Indian users are set to trade between Rs 17 trillion and Rs 18 trillion annually on offshore platforms by 2027. Further, this would imply that the potential TDS collection forgone would be about Rs 17,700 crore each year, assuming current rates.
The global perspective
In this respect, comparative practice gives insights. No other G20 member imposes a withholding tax on crypto transactions. The United States regards crypto-assets as property and allows loss deductions. The United Kingdom imposes taxes according to capital gains tax principles, allowing loss carry-forwards. Germany exempts assets held for more than a year, while Singapore does not impose a capital gains tax unless trading is a business venture.
India, meanwhile, has adopted the Crypto-Asset Reporting Framework (CARF) proposed by the OECD and will commence exchanging information on its crypto assets automatically with over 40 states from 2027. The CARF framework aims to solve the problem posed above by ensuring that crypto assets cannot escape being detected by tax authorities.
Case for recalibration
Finally, a policy intervention is required, but this does not necessarily mean retreating from regulation. In this regard, the Select Committee of the Lok Sabha, reviewing the Income Tax Bill, 2025, recommended reducing the TDS on VDA transactions to a token rate of, say, 0.01%, similar to the Securities Transaction Tax levied on equities. It is estimated that if domestic turnover grows to pre-2022 levels, this move can generate tax revenue of Rs 9,000 crore to Rs 18,000 crore over five years through expanding, rather than compressing, the taxable base.
In addition, a provision for limited loss set-offs and rationalisation of thresholds can mitigate economic distortions while not compromising effective administration. Of equal importance is clarity in regulations regarding banks' access to legitimate VDA businesses to ensure these do not migrate into peer-to-peer platforms, which operate out of regulatory sight.
Given that India is adopting the OECD Crypto-Asset Reporting Framework, increasing reliance can be placed on information exchange rather than transaction friction. Overall, a neutral framework separating monitoring from punitive measures would help achieve regulatory transparency as well as revenue generation objectives. Hence, there is little doubt about the existence of crypto trading; the pertinent question is whether it will take place under the ambit of Indian tax laws or outside them.
Rakshita Malviya is a Public Policy Consultant in the office of a Member of Parliament (Lok Sabha).
