India’s government is heading into this year’s Union Budget under growing pressure to overhaul its harsh crypto tax rules, as a large share of local trading activity quietly migrates to offshore platforms. The shift is not only draining volumes from Indian exchanges but also raising concerns that the state is losing both tax revenue and regulatory visibility over a fast-growing asset class.
Recent data from crypto tax platform KoinX illustrates the scale of the exodus. Indian users now conduct close to three-quarters of their crypto trading volume on platforms based outside the country—around $6.1 billion (₹51,252 crore). Only about 27.33% of trading still flows through domestic exchanges. For a sector that once aspired to make India a key hub of digital asset innovation, that imbalance is alarming.
The timing is particularly sensitive. Finance Minister Nirmala Sitharaman is preparing to present her ninth consecutive Union Budget, an unusual streak in modern Indian politics and a moment that the crypto industry sees as a potential turning point. Market participants are hoping not for special treatment, but for relief from what many describe as a tax regime designed more to deter than to regulate.
The 2022 “tax hammer”
In 2022, India introduced one of the world’s most stringent tax frameworks for virtual digital assets (VDAs). Gains from crypto transactions are subject to a flat 30% tax—similar to the top slab for gambling and lottery winnings—regardless of the investor’s income bracket. On top of that, a 1% tax deducted at source (TDS) is imposed on nearly every crypto trade above a low threshold.
Critically, losses from one crypto trade cannot be offset against gains from another, nor can they be set off against other types of income. For active traders, market-makers, and arbitrageurs, this transforms normal trading risk into a near-impossible equation. Each profitable trade is fully taxed, while losing trades offer no tax relief, even within the same financial year.
The 1% TDS, while seemingly small, has proven especially damaging to market liquidity. On high-frequency strategies, this repeated deduction can erode capital quickly, forcing serious traders either to drastically reduce their volumes or shift to platforms beyond India’s direct reach. Many have chosen the latter.
Rationalisation, not rollback
Industry leaders and tax professionals are not demanding that crypto be tax-free. Instead, they are calling for what they term “rationalisation” of the framework. Broadly, their asks fall into three categories:
1. Lowering the TDS rate: Proposals commonly suggest cutting TDS from 1% to between 0.01% and 0.1%. A minimal levy would still allow the government to track transactions and maintain a trail for compliance purposes without choking liquidity and driving traders away.
2. Allowing loss set-off and carry-forward: Treating crypto like other capital assets for tax purposes—where losses can offset gains—would align the rules with basic principles of income taxation. This would also reduce the incentive to move activity offshore purely to escape punitive asymmetry.
3. Clarifying treatment of different use cases: Long-term investors, day traders, DeFi participants, and NFT creators all face different economic realities. Industry voices argue for clearer segmentation, so that staking rewards, airdrops, or tokenized real-world assets are not lumped into a one-size-fits-all, maximum-penalty bucket.
According to many analysts, such reforms would not represent a rollback or policy reversal, but a normalization that could actually expand the government’s tax base by attracting capital and activity back into the formal, trackable system.
Enforcement gaps and unintended consequences
The current framework was introduced with the stated aim of improving transparency and preventing misuse of crypto for illicit activities. Yet, the mass migration of trading volume to offshore platforms undermines that objective.
When users trade on foreign platforms that are not registered in India and often do not share detailed data with Indian authorities, regulators lose visibility over traders’ positions and flows. Even if income from those trades is technically taxable in India, enforcement becomes significantly harder.
Moreover, domestic exchanges, which are usually the entities most willing to cooperate with regulators, are bearing the brunt of the policy. Lower liquidity, shrinking user bases, and thinner order books make it difficult for them to compete. This trend risks consolidating the market in favor of global giants while weakening homegrown players that operate under India’s rules and employ local talent.
Some tax experts also warn that the current regime could push users into informal channels. Peer-to-peer trades or use of decentralized protocols without KYC controls may rise if regulated platforms feel structurally uncompetitive. That would run counter to India’s broader push for traceability and financial integrity.
Global divergence: India vs. other major markets
India’s hardline approach stands in contrast with how many other large economies are handling crypto taxation. While no major jurisdiction treats digital assets as a tax-free zone, several have opted for more balanced frameworks that integrate crypto into existing capital gains rules or income tax structures.
In countries where loss set-off is allowed and TDS-like mechanisms are not imposed on every trade, professional traders can operate without crippling friction. This encourages them to use local, regulated venues and to report their earnings in line with domestic law. In some cases, the resulting clarity has turned those jurisdictions into global hubs for exchanges, custodians, and blockchain startups.
For India—home to one of the world’s largest pools of tech-savvy retail investors and developers—the risk is that excessive tax friction may push talent, innovation, and capital to more welcoming regimes. Over time, that could mean missing out on high-value jobs and investment in a sector that is still in an early growth phase globally.
What the industry is watching for in the Budget
Against this backdrop, the Union Budget has become a focal point for expectations. The crypto community is particularly alert to a few signals:
– Any change to TDS: Even a modest reduction would be read as a sign that the government is willing to recalibrate in light of real-world market behavior.
– Formal recognition of loss set-off: A move to align crypto with other asset classes in this regard would change the economics for both retail and institutional traders.
– Announcements on a comprehensive VDA framework: A commitment to a structured, long-term regulatory and tax roadmap could reduce uncertainty for businesses deciding whether to base operations in India.
While sweeping reform in a single Budget may be unlikely, incremental steps could set a new tone and encourage dialogue between policymakers and the industry.
Balancing risk, innovation, and revenue
Policymakers face a genuine dilemma. Crypto markets are volatile, and there are legitimate concerns around consumer protection, fraud, capital flight, and money laundering. At the same time, a purely prohibitive stance risks pushing activity into the shadows without actually eliminating the underlying risks.
A more nuanced framework could aim to strike three balances:
1. Risk vs. participation: Allowing regulated platforms to flourish domestically gives authorities more control and insight than pushing users toward offshore or opaque channels.
2. Revenue now vs. revenue later: Extremely high effective tax rates may generate short-term collections on a shrinking base. More moderate rates, combined with higher participation and better compliance, could yield greater revenue over time.
3. Control vs. competitiveness: As global finance becomes increasingly digital, countries that find the right regulatory balance are more likely to attract investment and talent. Overly restrictive policies can leave even large economies playing catch-up.
Implications for Indian traders and investors
For individual traders, the current situation creates a complex calculus. Staying on Indian platforms means navigating 30% taxes on gains, 1% TDS on trades, and no offset for losses. Moving offshore might offer better liquidity and fewer frictions at the point of trade, but it comes with its own risks: evolving cross-border rules, potential future enforcement, and the responsibility to self-report income to Indian authorities.
Long-term investors face slightly different challenges. Those who buy and hold may trade less frequently and therefore suffer less from TDS. However, the inability to claim losses in a market known for sharp drawdowns makes portfolio management harder. Clearer rules could help these investors plan more prudently, rather than simply hoping the tax environment becomes more forgiving.
The role of compliance and education
Whatever the outcome of the upcoming Budget, one persistent gap is awareness. Many retail users either misunderstand their obligations or assume that offshore activity is invisible to tax authorities. Over time, as international information-sharing agreements expand and data analytics improve, that assumption is likely to become dangerous.
There is growing recognition that better guidance—plain-language explanations, illustrative examples, and accessible tools—is needed to help users remain compliant. Exchanges, tax platforms, and professional advisors can play a role here, but coherent, official communication from authorities will remain crucial.
A test case for digital-era policymaking
India’s approach to crypto taxation is increasingly seen as a test case for how the country handles emerging, fast-moving technologies that straddle finance and the internet. The choices made now will set precedents not just for crypto, but for future innovations such as tokenized real-world assets, programmable money, and new forms of digital ownership.
A recalibration of crypto taxes in the Union Budget—especially a rationalisation of TDS and a more equitable treatment of gains and losses—would signal that policymakers are willing to adjust course when evidence shows that policy design is producing unintended outcomes. Conversely, maintaining the current framework without change would suggest that deterrence remains the overriding priority, even at the cost of pushing activity beyond India’s reach.
As the Budget day approaches, traders, exchanges, tax professionals, and technology entrepreneurs will be watching closely. The direction New Delhi chooses could determine whether India becomes a central player in the global digital asset economy or continues to watch a substantial share of its crypto activity—and the associated economic potential—unfold offshore.