By Nischal ShettyCrypto taxation in India was introduced at a moment when digital assets were gaining rapid adoption, but regulatory clarity was still evolving globally. In the Union Budget of 2022, the government implemented a flat 30 percent tax on income from virtual digital assets, along with a 1 percent tax deducted at source (TDS) on each transaction. The intent was to create a trail for transactions, and bring an emerging asset class within a defined fiscal framework.Three years later, both the ecosystem and the regulatory environment have matured. India now leads the world in crypto adoption, while global standards around compliance, reporting, and oversight have become clearer. In this context, there is an opportunity to review certain elements of the current tax framework so that it serves its original objectives with present-day realities.The upcoming Union Budget offers a moment to consider how crypto taxation can better align incentives with outcomes. The existing framework is perceived by many participants as relatively stringent.The impact of the 1 percent TDS is an example of this. For long-term investors, the deduction may appear manageable. However, for active traders and liquidity providers operating on thin margins, even small deductions on every transaction can result in capital being locked up. Market-making and arbitrage strategies, which typically operate at margins of 0.01 to 0.05 percent per trade, become difficult to sustain. Industry-reported data indicates that after TDS was introduced in July 2022, trading volumes on Indian exchanges declined sharply. Between July 2022 and July 2023 alone, an estimated ₹3.5 lakh crore of Indian crypto trading activity shifted to offshore platforms that did not deduct TDS.Reduced participation from liquidity providers has led to thinner order books, with Indian platforms often trading at premiums compared to global markets. While the objective of TDS was to enhance transparency, a portion of activity instead moved to peer-to-peer channels and overseas venues beyond India’s immediate supervisory reach.At the same time, India’s regulatory framework has strengthened considerably. Since March 2023, virtual asset service providers have been brought under the Prevention of Money Laundering Act and are now reporting entities registered with FIU-IND. Robust know-your-customer norms, suspicious transaction reporting, and actions against non-compliant offshore exchanges are already in effect. So transaction monitoring is no longer dependent on TDS alone. In this environment, a relatively high transaction-level TDS is primarily discouraging. Broadening the onshore tax base could therefore be more effective than relying on transaction-level deductions.In 2024-25, the value of cryptocurrency transactions in India exceeded ₹51,000 crore, based on tax collection numbers of ₹511.8 crore. Lowering the TDS to 0.01% will also enable the record keeping of trading activities but provide relief to users.There are also wider ecosystem considerations. Users who move to unregulated platforms are exposed to higher operational and security risks. Indian cybersecurity firms have flagged losses linked to misleading offshore platforms promoted via social media. Keeping activity within India’s regulated perimeter enables better oversight. Carrying out survey actions under Section 133A of the Income Tax Act, 1961, against global platforms catering to Indian users, has revealed non compliance of TDS provision, with unreported TDS of several crores falling on users. According to Tax India Online Knowledge Foundation, if existing policies remain unchanged, cumulative uncollected TDS could approach ₹40,000 crore over the next five years, making the end user vulnerable due to non reportage.Domestic exchanges have also felt the impact. Customer support and compliance costs have increased for the platforms so that security, and reporting systems are aligned with Indian regulations.Another area that needs consideration is the treatment of losses. At present, losses from crypto transactions cannot be set off or carried forward, even within the same asset class. This creates an asymmetric tax structure that differs from most other financial assets. Allowing limited loss set-offs within the asset class would align crypto taxation more closely with established principles of fair taxation.A combination of targeted adjustments, such as reducing TDS to 0.01 percent and permitting loss set-offs, would not dilute oversight or enforcement. Instead, it could help restore liquidity, improve price discovery, and encourage activity to return to compliant Indian platforms operating under PMLA oversight and FIU-IND reporting norms. A calibrated update could help ensure that India captures economic activity, innovation, and tax revenues domestically, rather than seeing them move elsewhere.The upcoming Budget presents an opportunity to fine-tune the tax framework so that it supports compliant service providers, and protects domestic users. Such an approach would not be a departure from prudence, but a step towards ensuring that India captures the full benefits of a fast-maturing digital asset ecosystem.(Nischal Shetty is founder, WazirX)
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