Anticipating Budget 2026: The Need for a Timely Recalibration of India’s Cryptocurrency Tax Framework
Crypto taxation in India has evolved significantly since its introduction in 2022, when a flat 30% tax on income from virtual digital assets and a 1% tax deducted at source (TDS) on transactions were implemented. As the country now leads the world in crypto adoption, there is an opportunity to reassess the current tax framework in light of the maturing ecosystem and regulatory environment. The upcoming Union Budget is seen as a crucial moment to consider adjustments that could better align taxation with the realities of the market and encourage compliance among users.
Current Tax Framework and Its Challenges
The existing tax framework for cryptocurrencies in India has been perceived as stringent by many in the industry. The 1% TDS, while intended to create a transparent transaction trail, has raised concerns among active traders and liquidity providers. For long-term investors, this deduction may seem manageable, but for those operating on thin margins, even small deductions can significantly impact their capital. Market-making and arbitrage strategies, which typically function within narrow profit margins, have become increasingly difficult to sustain under the current tax regime.
Data from the industry indicates a sharp decline in trading volumes on Indian exchanges since the introduction of TDS in July 2022. An estimated ₹3.5 lakh crore worth of trading activity shifted to offshore platforms that do not impose TDS between July 2022 and July 2023. This migration has resulted in thinner order books on Indian platforms, which often trade at premiums compared to global markets. While the goal of TDS was to enhance transparency, it has inadvertently pushed some trading activities to peer-to-peer channels and international venues, evading India’s regulatory oversight.
Strengthening Regulatory Framework
Since March 2023, India’s regulatory framework for virtual asset service providers has strengthened significantly. These entities are now subject to the Prevention of Money Laundering Act and must register with the Financial Intelligence Unit of India (FIU-IND). This includes robust know-your-customer (KYC) norms and mandatory reporting of suspicious transactions. As a result, transaction monitoring is no longer solely reliant on TDS, making the high transaction-level TDS less justifiable.
In this context, reducing the TDS rate could encourage more trading activity to remain within India’s regulated framework. Broadening the onshore tax base may prove more effective than maintaining a high transaction-level deduction. In the 2024-25 fiscal year, the value of cryptocurrency transactions in India surpassed ₹51,000 crore, with tax collections reaching ₹511.8 crore. A reduction of TDS to 0.01% could facilitate better record-keeping of trading activities while providing relief to users.
Addressing Ecosystem Risks and Compliance Costs
The shift of users to unregulated platforms poses significant operational and security risks. Indian cybersecurity firms have reported losses linked to misleading offshore platforms promoted through social media. Keeping trading activities within India’s regulated environment allows for better oversight and protection for users. Recent surveys conducted under Section 133A of the Income Tax Act have revealed non-compliance with TDS provisions among global platforms catering to Indian users, indicating a potential loss of several crores in unreported TDS.
Domestic exchanges have also felt the impact of the current tax structure, facing increased customer support and compliance costs to align their operations with Indian regulations. This has raised concerns about the sustainability of these platforms in the long run. Additionally, the treatment of losses from crypto transactions remains a contentious issue. Currently, losses cannot be offset or carried forward, creating an asymmetric tax structure that differs from most other financial assets. Allowing limited loss set-offs would align crypto taxation more closely with established principles of fair taxation.
Future Considerations for Crypto Taxation
The upcoming Union Budget presents a pivotal opportunity to refine the tax framework governing cryptocurrencies in India. Targeted adjustments, such as reducing TDS to 0.01% and permitting loss set-offs, could enhance liquidity and improve price discovery. These changes would not compromise oversight or enforcement but could encourage activity to return to compliant Indian platforms operating under the PMLA and FIU-IND regulations.
A calibrated update to the tax framework could ensure that India captures economic activity, innovation, and tax revenues domestically, rather than allowing them to migrate offshore. Such an approach would support compliant service providers and protect domestic users, ultimately enabling India to fully harness the benefits of a rapidly evolving digital asset ecosystem.
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