India's Tax Department Echoes Reserve Bank's Concerns on Crypto

India’s tax authorities have joined the Reserve Bank of India in raising concerns about virtual digital assets (VDAs), highlighting enforcement challenges linked to the technology’s pseudonymous nature and cross-border transfers according to reports. During a parliamentary committee meeting, officials from the Income Tax Department (ITD) and the Financial Intelligence Unit (FIU) outlined difficulties in tracking crypto transactions and detecting taxable income. The discussion emphasized the risks of offshore exchanges and decentralized finance (DeFi) platforms, which complicate regulatory oversight.

The ITD cited jurisdictional overlaps and limited enforcement reach in cross-border crypto activity, which makes it difficult to reconstruct transaction chains or identify holders for tax purposes. A key concern is that high taxation and limited regulatory clarity are driving activity offshore, reducing India’s ability to monitor and tax these transactions effectively. The Finance Ministry has also raised concerns about the misuse of customer funds and insider trading on centralized exchanges.

In parallel, the Bharat Web3 Association has called for reforms to India’s crypto taxation regime ahead of the 2026 Union Budget. The industry group argued that the 30% tax on crypto gains and 1% tax deducted at source (TDS) per transaction have increased costs for traders and reduced liquidity. Association Chairperson Dilip Chenoy emphasized the need for lower TDS rates, the ability to offset losses against gains, and alignment with taxation of other asset classes.

Why Did This Happen?

India’s high tax burden on crypto transactions has created challenges for both users and businesses. Since 2022, a flat 30% tax has applied to gains from digital assets, with a 1% TDS deducted on all transfers, regardless of profitability. These rules have created friction for the industry and discouraged onshore participation. The association also noted that transaction-based taxes have led to reduced compliance and increased offshore activity.

Industry leaders added that limited access to banking services for Web3 companies has further hampered growth. Despite the legality of crypto trading, many firms face delays in opening accounts or sudden service withdrawals, disrupting daily operations and limiting international partnerships.

How Did Markets React?

The government’s stance on crypto has remained cautious, with a focus on balancing innovation with financial oversight. Finance Minister Nirmala Sitharaman has emphasized the importance of tracking digital assets and preventing tax evasion, particularly as the 2026 Union Budget approaches. The FIU has also flagged issues with crypto-laundering and misuse of customer funds on centralized exchanges.

Meanwhile, the government has promoted an RBI-backed digital currency as an alternative to privately issued crypto assets. Union Minister of Commerce and Industry Piyush Goyal stated that heavy taxation is intended to protect users from unbacked crypto assets. However, critics argue that this approach may stifle innovation and push more trading offshore.

What Are Analysts Watching Next?

Analysts are closely watching whether the 2026 Union Budget will bring meaningful reforms to crypto taxation and regulatory oversight. While major legislation may not be introduced, adjustments to tax rates or policy signals could influence market activity. The industry is pushing for clearer guidelines, a national regulatory sandbox for Web3, and a framework that distinguishes between speculative trading and enterprise blockchain use.

At the same time, the ITD has signaled a crackdown on crypto-related irregularities, including misuse of customer funds and insider trading. Authorities have also pledged to use AI and global data-sharing under the Crypto-Asset Reporting Framework to cross-match TDS data with income tax returns. These measures are intended to enhance compliance and reduce enforcement gaps.

The government’s next move will be closely observed as it seeks to balance regulatory control with India’s growing digital asset ecosystem. With more than 93 million crypto users in the country, the stakes are high for policymakers as they prepare to present the Union Budget on February 1.