Unregulated Crypto Market Causing Tax Leakage

While the word has advanced far in regulating crypto currency, India’s domestic crypto regulation remains undefined.

Even G20 peers are moving decisively to formalise digital asset frameworks. India, with over 115 million crypto users and the world’s second-largest Web3 developer base, still lacks a regulatory framework, despite cryptocurrency having evolved from a fringe technology into a mainstream financial alternative over the past decade, providing access and autonomy to millions.

Today, India is home to the largest global base of retail crypto users and ranks second in Web3 developer activity. Yet, while usage grows, consumer protection remains critically absent. Sources said the government may not be in a hurry to finalise a regulatory framework for cryptocurrencies, as it would mean labelling them as a legal security or tender, which could lead to ‘dollarisation’ of the Indian economy.

The banking sector regulator, the RBI, also shares the same view that cryptocurrencies have the potential to serve as a medium of exchange and potentially replace the rupee in financial transactions, both domestically and internationally.

India’s failure to follow through on its G20 commitments is no longer just a delay—it is becoming a liability. While global powers move forward with licensing, investor protections, and enforcement regimes, India’s silence sends conflicting signals to both domestic stakeholders and international partners. A Supreme Court observation should serve as a wake-up call. It flagged the government's inconsistent stance, taxing crypto at 30% without regulating it. In response, Additional Solicitor General stated that the government would “take instructions,” indicating internal deliberations—but without providing any timelines.

Also, another SC bench turned down a petition asking for regulations while mentioning that “the prayers made in this petition are within the domain of the Legislature and the Executive.”

So, where are we in India? Despite once championing a globally coordinated cryptocurrency framework, India has failed to enact any domestic legislation to govern Virtual Digital Assets (VDAs).

The much-awaited Discussion Paper, announced last year, has yet to be released. Meanwhile, domestic exchanges operate in a state of uncertainty, and offshore platforms capitalise on the regulatory vacuum. 

In Budget 2022, the Indian government introduced taxation on Virtual Digital Assets (VDAs), implementing a rigid framework that includes a flat 30% tax on gains from crypto assets, with no allowance for deductions except the cost of acquisition. Additionally, losses from VDAs cannot be offset against other income sources, diverging sharply from equities and other asset classes, which typically allow for loss adjustments.

A further impediment is the 1% Tax Deducted at Source (TDS) on crypto transactions exceeding Rs 50,000, which is intended to track transactions but inadvertently encourages investors to use offshore platforms. 

While the TDS was envisioned as a monitoring mechanism to ensure traceability, it has had the opposite effect. By imposing a deduction on every trade, irrespective of profitability, it has disincentivized domestic trading and accelerated capital flight.

 Indian traders, particularly high-frequency participants and market makers have increasingly migrated to offshore platforms where such a levy does not exist.

This shift has rendered the TDS framework largely ineffective in fulfilling its original intent. Estimates suggest that only about 7% of crypto transactions by Indians fall within the TDS net, resulting in over 93% of the activity slipping out of the government’s tax perimeter. 

The last significant change was in March 2023, when crypto service providers were directed to register with FIU-India as reporting entities under the PMLA. 

Recent data indicates that approximately Rs 2.5 lakh crore worth of trading volumes have migrated offshore due to the burdens imposed by the TDS regime. Astonishingly, despite the immense value of Indian-held crypto assets—estimated at over $300 billion—only ₹330 crore in TDS was collected by FY24, underscoring significant revenue leakage. The contrast is even starker when considering that a well-calibrated system could have collected several times more revenue simply by retaining these trades within the domestic framework.

Moreover, the existing tax regime has unintentionally fostered capital flight and an informal peer-to-peer market, undermining regulatory oversight and financial security. Peer networks, VPN-enabled trading, and offshore accounts have become preferred channels, drastically limiting the government’s ability to monitor or control fund flows.

 This situation starkly contrasts with equity markets, where regulatory frameworks encourage robust domestic participation. India's harsh tax policies also discourage Web3 startups and crypto entrepreneurs, causing a mass exodus of talent and innovation to jurisdictions like Singapore, Dubai, and the UK, which offer clearer and more progressive crypto policies.

Amid growing global calls for coordinated cryptocurrency regulation, India assumed the G20 Presidency on December 1, 2022. 

A consensus on the need for a comprehensive global framework as part of the New Delhi Leaders Declaration was reached. Since then, jurisdictions across the Americas, Europe, and Asia have introduced robust laws to integrate crypto into financial, tax, and supervisory regimes. The UK’s Financial Conduct Authority (FCA) is executing a multi-year roadmap centred on investor protection and risk management. 

It will invest £7.8m in developing and implementing a proportionate and safe regulatory regime for crypto activities. Australia is progressing with its Digital Assets (Market Regulation) Bill, aiming to regulate stablecoins by 2025, and has launched a comprehensive compliance campaign targeting crypto tax evaders.

In the EU, Markets in Crypto-Assets (MiCA) is now operational, setting standards for capital reserves, market integrity, and transaction thresholds.

France, Germany, and Italy are aligned with MiCA, while France has licensed global players, such as Circle, to issue stablecoins in the eurozone. 

Beyond the G20, Canada has mandated registration for all crypto platforms under a unified oversight body.

Indonesia is transitioning VDA supervision to its securities regulator under the P2SK Law. South Africa is preparing stable coin regulations following AML reforms, and Russia—despite sanctions—has legalised crypto mining and approved its use in cross-border trade. Japan has introduced updated crypto tax rules and Web3 policy frameworks, while South Korea’s Virtual Asset User Protection Act defines clear risk management and custody standards. Argentina has passed a tax amnesty law requiring disclosure of crypto held abroad through registered custodians.

 Brazil’s central bank is drafting regulations for stablecoins and tokenisation, alongside updates to foreign capital tracking, to account for digital assets.  Without swift policy action—through formal licensing frameworks, tax clarity, and effective regulatory enforcement—India may soon find itself not at the forefront but playing catch-up in a rapidly maturing digital financial landscape.