India’s government is heading into this year’s Union Budget under growing pressure to dial back its hardline stance on crypto taxation, as trading activity continues to migrate from local exchanges to offshore platforms.
A new report from crypto tax platform KoinX estimates that Indian users now conduct nearly three-quarters of their crypto trading volume on foreign exchanges. Out of a total estimated volume of around $6.1 billion (₹51,252 crore), only 27.33% is routed through Indian platforms, suggesting a sharp erosion of domestic liquidity and a corresponding loss of visibility for regulators and tax authorities.
The industry’s concern is not about regulation per se, but about what many see as an unworkable tax framework introduced in 2022. That year, India imposed a flat 30% tax on profits from virtual digital assets, along with a 1% tax deducted at source (TDS) on nearly every trade above a small threshold. Loss offsets across different coins were disallowed, and carry-forward of losses was effectively shut down, placing crypto in a much harsher category than most other asset classes.
For active traders and market makers, the 1% TDS has been particularly damaging. Because it applies to the gross value of each trade instead of net profits, it acts less like a standard tax and more like a steady drain on capital. High-frequency traders quickly discovered that maintaining meaningful volume on Indian exchanges would mean locking up substantial liquidity in tax deductions, even when they were not making money. Many responded by reducing activity or moving it abroad.
The consequences are now visible in the market structure. Domestic platforms report thinner order books, wider spreads, and lower liquidity compared to global exchanges catering to Indian users without being physically based in India. For ordinary investors, that often translates into worse prices and higher execution risk at home, reinforcing the incentive to open accounts with offshore platforms that are beyond direct Indian regulatory control.
Finance Minister Nirmala Sitharaman, who is set to present her ninth consecutive budget on Sunday—an achievement not seen in more than two decades—faces a delicate balancing act. On one side is the government’s desire to curb speculative frenzy, money laundering, and unaccounted wealth flows through digital assets. On the other is a rapidly maturing industry arguing that excessively punitive policies are backfiring, not by reducing risk, but by pushing activity into less transparent jurisdictions.
Industry leaders are not calling for a complete rollback of taxation, but for what they describe as “rationalisation.” This typically includes three key demands: reducing the TDS rate from 1% to something closer to standard securities transaction levels; allowing the set-off of losses against gains, at least within the crypto asset class; and re-examining the flat 30% rate so that it aligns more closely with capital gains treatment in other markets. The argument is that these changes would keep India competitive while still generating tax revenue and maintaining oversight.
A central criticism of the current approach is that it has failed on its own terms of enforcement. The intent in 2022 was to both capture revenue from a booming speculative market and create strong disincentives for reckless trading. Yet by nudging users to foreign exchanges that do not report directly to Indian authorities, the system may have reduced the taxable base instead of increasing it. When trades occur offshore, India’s ability to track volumes, profits, and counterparties becomes much more limited, leaving the state reliant on self-reporting and sporadic disclosures.
The compliance burden on honest participants has also increased. Retail investors and small traders must now navigate complex reporting requirements, track every single trade for TDS calculations, and reconcile those deductions against their final tax liability. For many, this has turned what was once a relatively simple investment activity into an accounting headache, especially in the absence of standardized reporting tools across platforms.
Globally, India’s framework is starting to look like an outlier. While many countries tax crypto gains, most have opted for systems that resemble existing capital markets rules: capital gains taxes on profits, often with the ability to offset losses; clear thresholds; and, in some cases, incentives for long-term holding. By contrast, India’s flat 30% plus 1% TDS structure has been described by analysts as more punitive than regulatory, aimed more at dampening participation than at integrating the sector into mainstream finance.
This divergence matters because it shapes where capital and innovation choose to settle. Startups and developers in the Web3 and blockchain space increasingly weigh tax certainty and regulatory clarity when deciding where to incorporate, raise funds, and build products. If trading volumes and talent both flow abroad, India risks missing out on a share of a growing global industry while still bearing the systemic risks that come with widespread retail exposure.
Critics of reform argue that loosening tax rules too quickly could fuel speculation and retail losses, especially in a market known for aggressive marketing and meme coin frenzies. They warn that any signal of a softer stance might be interpreted as an endorsement of volatile assets that remain poorly understood by many investors. From this perspective, high taxes and strict rules serve as a brake on bubbles and as a way to protect households from overexposure.
Proponents counter that speculation has not meaningfully subsided; it has just moved. Indian users can still access leverage, derivatives, and obscure tokens with a few clicks—only now, much of that activity is happening on platforms where Indian law has little reach. They argue that responsible participation is better achieved through proportionate regulation, disclosure requirements, and investor education than through blunt fiscal penalties.
Behind the public debate is a more technical question: what is the optimal level of TDS that maintains traceability without crippling liquidity? Some policy thinkers suggest that even a modest reduction—from 1% to a fraction of that amount—could significantly improve market conditions in India without meaningfully reducing the government’s ability to track transactions. Lower TDS might also encourage more platforms to maintain a formal presence in India, improving data sharing and supervisory coordination.
Another unresolved issue is the treatment of different types of crypto activity. Under the current regime, long-term holders, day traders, NFT collectors, and DeFi users often find themselves lumped into the same broad category of “virtual digital asset” transactions, even though their risk profiles and behaviors diverge widely. A more nuanced framework could differentiate between investment, payments, staking, and purely speculative trading, applying tailored rules to each segment.
The budget moment is also an opportunity for the government to clarify its broader stance on digital assets in relation to its own push for digital public infrastructure and a central bank digital currency. India has been vocal about the promises of digital payments and blockchain-based solutions in areas like identity, land records, and supply chain transparency. A tax system that chokes crypto markets without distinguishing between speculative tokens and genuinely useful digital assets sends a mixed signal about the country’s digital ambitions.
Legal experts highlight another risk: if India maintains one of the world’s harshest tax regimes without a corresponding regulatory framework that defines what is allowed and what is not, it may inadvertently foster a grey zone. Businesses might be reluctant to innovate domestically, while individuals continue to experiment through foreign channels. Over time, that gap between formal policy and on-the-ground practice can undermine respect for both tax law and financial regulation.
In practical terms, the next budget is unlikely to deliver everything the industry is asking for. But even incremental moves—such as a modest cut in TDS, a pilot mechanism for loss offsets under certain conditions, or a commitment to review the 30% rate in a time-bound manner—could be read as signals that the government is open to recalibrating. That alone might slow the exodus of traders and help domestic exchanges regain some footing.
For ordinary Indian investors, the outcome will shape not just their tax bills but also their choices: whether to stay within the domestic financial system or continue to seek better liquidity, lower friction, and more product variety abroad. For the state, the decision will help determine whether crypto becomes a taxable, supervisable part of the formal economy or remains a large, porous frontier sitting just beyond the reach of domestic oversight.
Whatever the budget announces, the underlying tension is clear. India wants to project itself as a leader in digital innovation and financial inclusion, yet its current crypto tax regime is nudging capital, talent, and trading activity offshore. The coming policy adjustments—or the lack of them—will reveal whether the country intends to bring this market into the regulatory fold or continue to treat it primarily as a threat to be discouraged through taxation.