Why Crypto Derivatives Are Outpacing Spot Trading in India

The Indian cryptocurrency market is undergoing a profound structural shift. In 2025, crypto derivatives—particularly futures and options—have surged past spot trading in volume, driven by a combination of regulatory ambiguity and tax arbitrage. This shift is not merely a reflection of market preferences but a strategic response to a tax regime that penalizes spot trading while leaving derivatives in a regulatory gray zone. For investors, understanding this dynamic is critical to navigating the evolving landscape of digital assets in India.

The Tax Arbitrage Playbook

India's tax code treats virtual digital assets (VDAs) as a distinct category, subject to a flat 30% tax on profits and a 1% tax deducted at source (TDS) on every transaction. These rules, introduced in 2022, have created a high compliance burden for spot traders. Losses from spot trading cannot be offset against other income or carried forward, effectively stifling speculative activity. In contrast, crypto derivatives are classified as speculative business income, taxed at individual slab rates. This allows traders to deduct expenses, carry forward losses, and avoid the 1% TDS.

The arbitrage is stark. For example, a trader earning ₹10 lakh in profits from spot trading would pay ₹3.1 lakh in taxes (30% + 1% TDS). The same amount in derivatives profits, taxed at a 30% slab rate (assuming no deductions), would incur ₹3 lakh in taxes—plus the flexibility to offset future losses. This 10,000-rupee difference, multiplied by millions of traders, has created a powerful incentive to shift toward derivatives.

Regulatory Ambiguity as a Double-Edged Sword

The Indian government has yet to issue explicit guidelines on crypto derivatives, leaving the sector in a legal limbo. While the Central Board of Direct Taxes (CBDT) has hinted at seeking clarity, the lack of a formal framework has allowed exchanges to innovate. Platforms like CoinSwitch and Zerodha now offer INR-based futures, converting margins into stablecoins like USDT to access global liquidity. This hybrid model bypasses foreign exchange restrictions while leveraging India's domestic financial infrastructure.

However, this ambiguity carries risks. The CBDT has already issued notices to over 44,000 traders for undisclosed crypto income, signaling a potential crackdown. The government's proposed COINS Act, which aims to create a structured regulatory framework, could either formalize this arbitrage or impose stricter rules. For now, the gray zone persists, enabling traders to exploit loopholes while regulators deliberate.

Market Dynamics and Investor Behavior

The surge in derivatives trading is also fueled by high leverage. Indian exchanges offer up to 50x leverage on futures, allowing traders to amplify returns (and risks). This has attracted a new breed of retail investors, many of whom use family members' accounts in lower tax brackets to further reduce liabilities. Meanwhile, institutional players are hedging exposure through perpetual futures, which lack expiration dates and offer continuous liquidity.

The shift is evident in market data: derivatives volumes now exceed spot trading by a 3:1 ratio. Exchanges have capitalized on this trend, promoting derivatives via social media and OTT platforms. Yet, the reliance on offshore liquidity—via USDT conversions—raises questions about long-term stability. A collapse in stablecoin pegs or a regulatory clampdown on cross-border transactions could disrupt this model.

Investment Implications and Risks

For investors, the current environment presents both opportunities and hazards. The tax arbitrage in derivatives is a compelling short-term advantage, but it is contingent on regulatory inaction. A formalized framework could either normalize these benefits or impose higher compliance costs. Similarly, the reliance on leverage and stablecoins introduces counterparty and liquidity risks.

Investors should prioritize platforms with robust risk management and transparent reporting. Diversifying across spot and derivatives while maintaining a buffer for potential tax liabilities is prudent. Additionally, monitoring the CBDT's consultations and the COINS Act's progress will be critical for long-term strategy.

Conclusion

India's crypto derivatives market is a testament to the power of regulatory arbitrage. By exploiting a fragmented tax regime and ambiguous rules, traders have reshaped the market's structure. Yet, this shift is precarious. As the government moves toward clarity, the current advantages may erode. For now, derivatives offer a tax-efficient path, but investors must balance innovation with caution. The future of India's crypto market will hinge on whether regulators can strike a balance between fostering growth and ensuring compliance.