Indian Crypto Tax: Industry Demands Urgent Rethink Ahead of Critical February Budget

NEW DELHI, India – January 2026: As India’s government finalizes its fiscal priorities, the nation’s cryptocurrency industry is mounting a significant and urgent push for tax reform ahead of the pivotal February Union Budget, arguing that the current framework actively discourages domestic digital asset activity despite tightening regulatory compliance.

Indian Crypto Tax Framework Faces Mounting Criticism

The current Indian crypto tax regime, implemented in 2022, imposes a flat 30% tax on all virtual digital asset (VDA) gains. Furthermore, it applies a 1% Tax Deducted at Source (TDS) on the vast majority of transactions. Crucially, this TDS applies regardless of whether a trade results in a profit or a loss. Industry executives now contend this structure fails to reflect the maturation of both the global digital asset market and India’s own regulatory oversight mechanisms. They warn that maintaining the status quo risks pushing economic activity, innovation, and users to offshore platforms, thereby undermining the very compliance goals authorities seek to enforce.

Dissecting the Current Tax Pain Points

Industry leaders pinpoint two primary areas of friction within the existing Indian crypto tax system. First, the 1% TDS on transactions creates a significant liquidity drain. This upfront cost applies to each trade, making high-frequency trading strategies economically unviable on domestic exchanges. Second, the prohibition on using trading losses to offset gains creates a uniquely harsh environment for investors. Unlike traditional equity markets, crypto traders cannot net their losses against profits within a financial year, amplifying tax liabilities during market downturns. This combination, executives argue, has led to a notable migration of trading volumes to international platforms not subject to these rules.

Expert Perspectives on Policy Calibration

Nischal Shetty, founder of the Indian exchange WazirX, emphasizes the need for recalibration. “As India prepares for Budget 2026, there is a clear opportunity to fine-tune a framework which supports transparency and compliance while fostering innovation,” Shetty stated. He suggests the policy should be reassessed in line with the global evolution of Web3, citing increased institutional adoption. Similarly, Raj Karkara, COO of ZebPay, labeled the upcoming budget a “pivotal moment,” advocating for a rationalization of the TDS to improve onshore liquidity. SB Seker of Binance APAC called for a shift from a “tax-and-deter” regime to one focused on realized capital gains, which would improve fairness for retail participants.

Tightening Compliance Amidst Tax Debate

The calls for tax reform arrive concurrently with a substantial tightening of anti-money laundering (AML) and know-your-customer (KYC) requirements for Indian crypto platforms. Recently, India’s Financial Intelligence Unit (FIU) mandated stringent new verification protocols. These rules now require live selfie checks, geolocation and IP tracking, bank account verification, and additional government ID checks. This dual pressure—high taxes and rigorous compliance—places unique strain on domestic exchanges. They argue that facilitating such robust oversight is only sustainable if the underlying tax policy does not incentivize users to seek less-regulated offshore alternatives.

The Global Context and India’s Position

Globally, cryptocurrency taxation models vary widely, providing a comparative backdrop for India’s approach. The table below outlines key differences:

This comparison highlights India’s uniquely high and non-progressive tax burden on crypto assets. Policymakers are now weighing this against the nation’s stated goals of becoming a digital economy leader and fostering fintech innovation. The February 1 budget presentation represents one of the few legislative avenues to adjust these tax rates without passing entirely new laws, making it a critical deadline for the sector.

Enforcement Challenges and the Offshore Dilemma

Indian tax authorities have concurrently voiced their own concerns. Officials from the Income Tax Department recently warned lawmakers about the complexities of tracking taxable income generated through offshore exchanges, private wallets, and decentralized finance (DeFi) protocols. This creates a paradoxical situation: strict onshore rules may drive activity to opaque offshore venues, actually reducing the government’s ability to monitor and tax the ecosystem effectively. Industry advocates posit that a more balanced tax regime would encourage repatriation of liquidity and trading activity to compliant, monitorable domestic platforms, thereby enhancing overall tax collection and regulatory oversight.

Potential Pathways for Reform in Budget 2026

As the Ministry of Finance drafts the budget, several potential modifications are under discussion based on industry submissions:

• TDS Reduction or Tiering: Lowering the 1% TDS rate or applying it only above a high-value threshold to reduce friction for retail traders.
• Introduction of Loss Set-Off: Allowing traders to offset crypto losses against gains within the same financial year, aligning with treatment of other capital assets.
• Review of Flat Tax Rate: Considering a progressive tax structure for long-term holdings to incentivize investment over speculation.
• Clarification on GST: Providing clear guidance on Goods and Services Tax applicability for exchange services and token transactions.

The outcome will signal India’s strategic direction for its digital asset sector. A reformed approach could position the country as a compliant innovation hub. Conversely, maintaining the current framework may consolidate its reputation as a high-tax jurisdiction for crypto, potentially ceding ground to global competitors.

Conclusion

The debate surrounding Indian crypto tax policy has reached a critical juncture ahead of the February 2026 Union Budget. Domestic exchanges are presenting a unified case for reform, arguing that the existing 30% flat tax and 1% TDS, combined with restrictive loss-offset rules, are counterproductive. They assert that these policies drain onshore liquidity even as platforms shoulder heavier compliance burdens. The government now faces a complex balancing act: fostering a regulated, innovative digital asset ecosystem while ensuring robust revenue collection and investor protection. The budget announcement on February 1 will provide a definitive signal of India’s regulatory trajectory for the cryptocurrency industry, with significant implications for its future as a financial technology center.

FAQs

Q1: What are the current cryptocurrency tax rates in India?
The current Indian crypto tax framework imposes a flat 30% tax on all gains from Virtual Digital Assets (VDAs) and a 1% Tax Deducted at Source (TDS) on most transactions. Losses from one trade cannot be used to offset gains from another.

Q2: Why are Indian crypto exchanges pushing for tax reform now?
Exchanges are lobbying ahead of the Union Budget, presented on February 1, as it is a key legislative vehicle for tax changes without requiring new standalone laws. They argue the 2022 rules are now outdated and hinder the growth of the compliant domestic industry.

Q3: What is the 1% TDS, and how does it affect traders?
The 1% TDS (Tax Deducted at Source) is an upfront tax deducted by the exchange on the value of most crypto transactions. It applies whether the trade is profitable or not, reducing working capital for traders and discouraging frequent trading on Indian platforms.

Q4: How do India’s crypto taxes compare to other major countries?
India’s combination of a high flat tax rate and a transaction-level TDS is among the strictest globally. Many other jurisdictions, like the US and UK, tax only capital gains (often at progressive rates) and allow loss offsets, with no transaction tax.

Q5: What changes are the crypto industry specifically requesting?
Key requests include a reduction or removal of the 1% TDS, allowing investors to set off trading losses against gains, and reviewing the flat 30% tax rate to potentially introduce a progressive structure for long-term holdings.