India’s Crypto Tax Push: Striking the Balance Between Compliance and Innovation

India’s tax authorities are intensifying their focus on cryptocurrency transactions and unreported assets, signaling a broader push for regulatory clarity and compliance within the volatile digital asset space. The Central Board of Direct Taxes (CBDT) has initiated formal consultations with cryptocurrency exchanges and industry stakeholders, aiming to refine the existing tax framework and address persistent challenges like liquidity constraints and ambiguity in regulatory oversight. Over the past two years, crypto-related tax collections have generated approximately ₹705 crore in revenue, while audits have uncovered an additional ₹630 crore in undisclosed income from virtual digital assets (VDAs), highlighting the scale of non-compliance [1].

As part of its crackdown, the CBDT has issued notices to over 44,000 cryptocurrency traders for failing to disclose their income from digital assets, encouraging voluntary compliance through its NUDGE campaign. The department is leveraging advanced technological tools such as Project Insight and the Non-Filer Monitoring System (NMS) to track discrepancies between tax filings and TDS data from exchanges. These measures reflect a data-driven approach to detecting evasion and improving transparency in a sector prone to speculative and opaque behavior [1].

Current tax policies for cryptocurrencies in India remain complex and inflexible. Under Section 115BBH of the Income Tax Act, capital gains from crypto trading are taxed at a flat rate of 30%, with no allowance for loss offsetting. Additionally, a 1% Tax Deducted at Source (TDS) applies to every transaction over a specified threshold, contributing to reduced liquidity on domestic exchanges. Industry participants argue that these rates are excessively high and discourage long-term investment. Many traders have consequently migrated overseas, where more favorable regulatory environments exist [1].

To address these concerns, the CBDT has proposed potential reforms, including a reduction in the TDS rate to between 0.1% and 0.5%, as well as the introduction of a framework allowing for the carry-forward and set-off of crypto-related losses. These adjustments aim to align India’s crypto tax regime with global standards while preserving tax revenues. There is also a growing consensus among industry players that a dedicated regulatory body should oversee the sector to eliminate jurisdictional overlaps currently managed by the Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), and the Ministry of Electronics and Information Technology (MeitY) [1].

Beyond tax considerations, broader regulatory uncertainties persist, including ambiguous definitions of crypto derivatives and unclear guidelines under the Foreign Exchange Management Act (FEMA). These issues complicate compliance for both investors and exchanges, contributing to the reluctance of banks to support crypto-related activities. In response, the government has shown interest in a unified legal framework that could define VDAs clearly, establish consistent operational standards, and facilitate cross-border transactions under the Crypto-Asset Reporting Framework (CARF) [4].

With India’s participation in global discussions on crypto regulation gaining momentum, the CBDT’s approach appears to balance the need for innovation with the imperative of tax compliance. A well-structured regulatory environment could attract foreign investment, create employment in the Web3 sector, and solidify India’s position as a regional hub for digital asset development. However, the success of these reforms will depend on the government’s ability to strike a delicate equilibrium between regulatory rigor and investor-friendly policies.

Source: [1] CBDT's Proposals for Crypto Regulation in India (https://www.linkedin.com/pulse/cbdts-proposals-crypto-regulation-india-ricago-vai6c) [2] Cryptocurrency in India | Latest News by Cointelegraph (https://cointelegraph.com/tags/india) [3] GST on Supply of Crypto or Digital Assets (https://cleartax.in/s/gst-on-supply-of-crypto-digital-assets) [4] India eyes clearer crypto tax rules with CBDT move (https://aibc.world/news/india-eyes-crypto-tax-reform/) [5] Is Crypto Legal in USA? Regulations & Compliance in 2025 (https://www.lightspark.com/knowledge/is-crypto-legal-in-usa)