Crypto assets have emerged as a major financial innovation of the 21st century, with India ranking among the top adopters in 2024. Millions of investors and businesses are engaged in crypto trading, decentralized finance (DeFi), and blockchain applications. However, a rigid taxation policy and lack of regulatory clarity are raising concerns over capital flight, reduced market liquidity, and hindered innovation.
This article explores India’s crypto tax framework, its economic impact, and potential solutions to foster industry growth while ensuring compliance.
India’s Crypto Taxation Framework
In Budget 2022, the Indian government introduced a distinct tax regime for Virtual Digital Assets (VDAs), including cryptocurrencies and NFTs. Key provisions include:
1. 30% Flat Tax on Gains
- All crypto profits are taxed at a flat 30% under Section 115BBH of the Income Tax Act.
- No deductions or exemptions allowed, except for the cost of acquisition.
2. No Loss Offsetting
- Losses from crypto investments cannot be offset against gains from other assets or income sources.
- Unlike equities, this restriction limits traders’ ability to manage risks effectively.
3. 1% TDS on Transactions
- A 1% Tax Deducted at Source (TDS) is levied on crypto transactions exceeding ₹50,000 (₹10,000 for some cases) under Section 194S.
- While designed to improve transaction tracking, it has reduced market liquidity and driven traders to offshore platforms.
A study by NALSAR University of Law and researcher Mayappan Nagappan found that the 1% TDS rule has significantly weakened India’s crypto trading volumes.
4. Taxation on Crypto Gifts
- Crypto assets received as gifts are taxed under “Income from Other Sources” at fair market value.
Economic Impact of India’s Crypto Tax Regime
1. Reduced Market Liquidity
The 1% TDS has led to a sharp decline in trading activity on Indian exchanges, forcing traders to shift to offshore platforms, impacting tax collection and regulatory oversight.
2. Capital Flight to Foreign Exchanges
India’s rigid tax structure has pushed investors to unregulated global exchanges and peer-to-peer (P2P) markets, reducing the government’s ability to monitor transactions.
3. Hindrance to Innovation & Web3 Startups
High taxes discourage blockchain startups from operating in India, prompting them to relocate to crypto-friendly countries like Singapore, Dubai, and the U.K.
Striking a Balance: Proposed Reforms
To promote sustainable crypto growth while ensuring compliance, India should consider:
- Reducing TDS from 1% to 0.1% – This will enable transaction tracking without draining liquidity, aligning with the Securities Transaction Tax (STT).
- Allowing Loss Offsetting – Permitting loss adjustments, as done in equity markets, will encourage responsible trading.
- Establishing a Crypto Regulatory Authority – A structured framework categorizing VDAs based on risk and use cases can provide market stability.
- Global Tax Alignment – Differentiated taxation based on holding duration can enhance India’s global competitiveness in the crypto space.
The Way Forward
India stands at a critical juncture in shaping its crypto policy. While the current tax structure provides clarity, its rigid nature discourages participation, drives innovation offshore, and reduces overall tax revenue. A flexible, well-balanced approach can position India as a leader in the Web3 economy while ensuring regulatory compliance.
By implementing strategic tax reforms, India can unlock the full potential of the crypto industry, fostering innovation, investment, and long-term economic growth.
