India’s Tax Clampdown on Crypto Sparks Debate: Compliance vs. Growth

India’s tax authorities have intensified their scrutiny of cryptocurrency transactions, signaling a broader enforcement strategy to address non-compliance and undisclosed trades. The Income Tax Department recently began issuing notices to individuals who failed to disclose past virtual digital asset (VDA) trades, with a particular focus on transactions spanning multiple years. This move aligns with a growing emphasis on transparency and data-driven compliance, leveraging advanced tools like artificial intelligence and digital forensics to trace unreported crypto activity [1]. The tax department is also training officers in blockchain analysis through programs led by institutions such as the National Forensics Science University, highlighting the technological dimension of the enforcement effort [1].

Notably, the government’s approach comes amid a regulatory environment already burdened by high tax rates. Currently, India taxes gains from cryptocurrency at a flat rate of 30%, with an additional 1% tax deducted at source (TDS) for every transaction. These levies have contributed to a shift in trading behavior, with many investors and traders opting to conduct transactions outside the country to avoid the heavy tax burden. As a result, India’s crypto market is lagging in global competitiveness, according to industry observers [1].

The Central Board of Direct Taxes (CBDT) is now consulting with industry stakeholders to determine whether a comprehensive legal framework is necessary for regulating VDAs. This includes evaluating whether the current 1% TDS is deterring traders, whether there should be provisions to allow loss offsetting against gains, and which regulatory body—RBI, SEBI, or FIU-IND—should oversee the sector [3]. The CBDT is also considering amendments to ensure India remains competitive while maintaining tax integrity.

To bolster compliance, the CBDT has launched the NUDGE (Notices for Underreported Gainers of Digital Assets) campaign, encouraging voluntary reporting before imposing penalties. As of recent data, the tax department has sent notices to over 44,000 traders and has uncovered ₹630 crore in undisclosed crypto income over the last two years. This enforcement drive has generated approximately ₹705 crore in taxes, underscoring its potential to improve revenue collection [3]. The use of tools like Project Insight and the Non-Filer Monitoring System has been instrumental in identifying discrepancies between tax filings and TDS data, closing compliance gaps [3].

Industry stakeholders, however, argue that the current regulatory approach is stifling growth and innovation. They have called for a reduction in the TDS rate and the allowance of loss offsetting, which they claim would make domestic trading more attractive and retain India’s talent pool. Failure to address these concerns could push more activity overseas, further eroding the domestic market’s potential [3]. The debate reflects a broader tension between the government’s goal of ensuring tax compliance and the industry’s push for a more balanced regulatory environment that supports growth and innovation [1].

As India continues to navigate this complex landscape, the coming months will likely reveal the extent to which the government is willing to adapt its policies to accommodate market realities while upholding its tax objectives. The development of a comprehensive crypto code, which could include clearer definitions, reduced tax rates, and streamlined compliance mechanisms, remains a key point of discussion among policymakers and industry players alike [3].

Source:

[1] India Tax Department Targets Undisclosed Crypto Trades (https://www.livebitcoinnews.com/india-tax-department-targets-undisclosed-crypto-trades/)

[2] Cryptocurrency Law in India 2025: Is Bitcoin Legal? (https://paykassma.com/blog/payments/is-cryptocurrency-legal-in-india)

[3] CBDT's Proposals for Crypto Regulation in India (https://www.linkedin.com/pulse/cbdts-proposals-crypto-regulation-india-ricago-vai6c)