Indian Authorities Flag Risks to Crypto Tax Compliance

India’s tax authorities have flagged growing challenges in enforcing tax compliance as cryptocurrency transactions expand. Officials warn that the anonymity, borderlessness, and near-instant nature of crypto transfers make it increasingly difficult to track and tax digital asset gains according to reports.

During a parliamentary finance committee meeting on January 7, the Income Tax Department (ITD) highlighted structural risks from offshore exchanges, private wallets, and decentralized finance (DeFi) tools. These technologies enable users to move funds without intermediaries, reducing visibility for tax authorities as financial data shows.

The ITD noted that the involvement of multiple jurisdictions in cross-border crypto activity complicates enforcement. Reconstructing transaction chains and identifying asset holders is "virtually impossible" in some cases, according to the report shared with the committee.

Why Did This Happen?

India’s financial regulators have intensified scrutiny of the crypto sector in recent months. The government imposed a 30% tax on all crypto gains and a 1% tax deducted at source (TDS) on every transaction, regardless of profitability as regulatory documents state. Despite these measures, enforcement remains challenging due to the decentralized and pseudonymous nature of many crypto activities.

Regulators also expressed concerns about how crypto transactions undermine traditional compliance mechanisms. The ITD cited the lack of jurisdictional clarity and limited enforcement reach when platforms operate outside India’s legal framework according to analysis.

How Are Markets Responding?

Despite the strict tax regime, India has seen increased crypto adoption. The Financial Intelligence Unit (FIU) has registered 49 cryptocurrency exchanges for anti-money laundering compliance in fiscal year 2024–2025. Of these, 45 are domestic exchanges, while four are offshore platforms as reported by the FIU.

The government has also taken steps to strengthen oversight, including using artificial intelligence and global data-sharing mechanisms. Authorities are cross-verifying TDS data reported by exchanges against individual tax filings to detect discrepancies according to official statements.

However, analysts remain skeptical about the effectiveness of the current approach. Local leaders argue that the tax framework fails to account for crypto losses, creating friction for traders. CoinSwitch co-founder Ashish Singhal has described the situation as unfair and counterproductive according to industry analysis.

What Are Regulators Planning Next?

The Indian government is preparing for its February 2026 Union Budget, with officials signaling a focus on tightening crypto oversight. The Finance Ministry aims to regulate decentralized platforms, privacy-focused systems, and offshore exchanges more closely as government officials stated.

The Financial Intelligence Unit and the ITD are aligned in their approach, with both bodies emphasizing the need for global coordination. They plan to expand enforcement efforts as part of India’s broader strategy to align with international regulatory standards.

At the same time, major U.S. exchanges like Coinbase have resumed operations in India, citing rising demand despite the high tax burden. Authorities are watching to see whether these platforms will comply with India’s strict reporting and compliance requirements according to exchange reports.

As the crypto sector evolves, regulators face the challenge of balancing innovation with oversight. The next phase of India’s digital asset policy will likely depend on how well current measures address enforcement gaps and investor concerns.