The Certainty of Taxes
Since 2022, India's stance on taxing Virtual Digital Assets (VDAs), which include cryptocurrencies and NFTs, has been unambiguous. Any gains from the transfer of these assets are subject to a flat 30% tax, plus a 4% cess, bringing the effective rate to 31.2%.
This tax applies regardless of the investor's total income or tax bracket and makes no distinction between short-term and long-term gains. To ensure compliance and track transactions, the government also implemented a 1% Tax Deducted at Source (TDS) on all transfers above a certain threshold. This TDS is levied on the total transaction value, not just the profit, and is deducted even on loss-making trades, with the goal of creating a transparent trail of all crypto activities.
The Pain of No Set-Off
Perhaps the most punitive aspect of India's crypto tax law is the strict prohibition on offsetting losses. Unlike in the stock market, where investors can set off losses against gains to reduce their tax liability, crypto losses cannot be used to offset crypto gains. For example, if an investor makes a ₹1 lakh profit on Bitcoin but suffers a ₹1 lakh loss on Ethereum, they still owe tax on the full ₹1 lakh gain. The loss is completely disregarded for tax purposes. Furthermore, these losses cannot be carried forward to subsequent financial years, a standard practice for other asset classes. This rule treats every profitable trade as a standalone taxable event, forcing investors to absorb the full impact of any losses.
The Broader Regulatory Vacuum
While the tax department's rules are crystal clear, the broader regulatory environment is a different story. Cryptocurrencies are legal to own and trade in India, following a 2020 Supreme Court decision that overturned a Reserve Bank of India (RBI) ban on banks servicing crypto businesses. However, they are not recognized as legal tender. Beyond taxation, there is no single, comprehensive regulatory framework governing the sector. Key bodies like the RBI and the Securities and Exchange Board of India (SEBI) have yet to finalize their approach, leading to a patchwork of rules and persistent uncertainty.
A Turf War Between Regulators
Part of the regulatory delay stems from a fundamental disagreement on what crypto is and who should govern it. The RBI has consistently expressed concerns about the risks private cryptocurrencies pose to financial stability and monetary policy, and it remains skeptical of their use. SEBI, on the other hand, is viewed as the potential supervisor for crypto exchanges, treating VDAs as investment assets similar to securities or commodities. Meanwhile, the Financial Intelligence Unit (FIU-IND) has been tasked with enforcing Anti-Money Laundering (AML) and terror financing laws, requiring all domestic and foreign crypto exchanges serving Indian customers to register and comply with KYC norms. This multi-regulator approach without a unifying law creates overlapping jurisdictions and mixed signals for the industry.
What This Means for Investors
For the average investor, this dual reality creates a challenging environment. The strict tax rules, particularly the 1% TDS and the no-loss-offset provision, require meticulous record-keeping for every single transaction. New compliance rules for 2026 have tightened reporting requirements even further, mandating transaction-by-transaction disclosure. At the same time, the lack of a complete regulatory framework means investors do not have access to the same level of protection or grievance redressal mechanisms available in traditional financial markets. Investing in a market that is taxed heavily but not fully regulated carries a unique set of risks that go beyond typical market volatility. Investors must be both diligent taxpayers and cautious participants in an evolving ecosystem.
