The Two Pillars of Crypto Taxation
The foundation of India's crypto regulation is built on two key tax provisions introduced in 2022. First, any income or profit from the transfer of a Virtual Digital Asset (VDA) is taxed at a flat rate of 30%, plus applicable cess and surcharges. This
applies to all gains, with no distinction between long-term or short-term holdings. Second, a 1% Tax Deducted at Source (TDS) is applied to all VDA transfers exceeding a threshold of ₹10,000 in a financial year. While the TDS can be claimed as a credit when filing taxes, its primary goal is to create a detailed transaction trail for the government, making every trade visible to tax authorities.
Punitive Rules By Design
India's crypto tax regime is deliberately stricter than rules for other asset classes like equities. Crucially, investors cannot offset losses from one cryptocurrency against gains from another. For example, a profit in Bitcoin cannot be offset by a loss in Ethereum; the tax is due on the full Bitcoin gain. Furthermore, these losses cannot be set off against any other income, nor can they be carried forward to future financial years. Deductions for costs associated with trading, such as exchange fees or internet expenses, are also disallowed. Only the initial cost of acquiring the asset can be deducted. This punitive structure is designed to discourage speculative, high-volume trading by reducing potential profitability.
Taxation Without Legalisation
The core of India's strategy is the paradox of “taxation without legalisation.” While the Income Tax Act provides a clear framework for taxing VDAs, no corresponding law grants them legal status as a currency, security, or commodity. The government and the Reserve Bank of India (RBI) do not recognise crypto as legal tender. This intentional ambiguity allows the government to generate revenue and monitor the ecosystem without formally legitimising it. The Finance Ministry has expressed concerns that a full regulatory regime could create a “false sense of security” for investors in what it considers a highly risky and volatile asset class. This leaves investors in a precarious position: they are legally required to pay high taxes on an asset class that is not legally recognised or protected.
The Goal: Control and Visibility
The government’s approach appears to be driven by a desire for control and visibility rather than an outright ban. After a 2018 RBI circular restricting banks from dealing with crypto firms was struck down by the Supreme Court in 2020, the government shifted its strategy towards monitoring. In 2023, crypto exchanges and service providers were brought under the Prevention of Money Laundering Act (PMLA). This move made them reporting entities, obligating them to perform KYC checks and report suspicious transactions to the Financial Intelligence Unit (FIU-IND). Paired with the TDS tax, the PMLA rules give authorities a powerful lens into the flow of money within the crypto ecosystem, helping them track illicit activities while stopping short of a full embrace.
The Path Forward Remains Unclear
As of late 2026, the future of a comprehensive crypto law in India remains uncertain. A Parliamentary Standing Committee on Finance has studied the issue, but the government has yet to act on its recommendations, with some ministries still advocating against formal regulation. The RBI, in particular, remains staunchly opposed to legalising private cryptocurrencies, preferring to promote its own Central Bank Digital Currency (CBDC), the e-Rupee. Meanwhile, the stringent tax policies and regulatory ambiguity have reportedly driven a significant portion of trading volume and crypto startups to more favourable jurisdictions. This outflow of capital and innovation is a growing concern for industry advocates who argue that clear, fair regulation is a better path than punitive taxation.
