India Faces Pressure to Rethink Crypto Taxes Ahead of Union Budget as Trading Shifts Offshore

As India approaches this year’s Union Budget, policymakers are under pressure to reassess the country’s punitive crypto tax framework amid capital flight to offshore platforms, raising questions about lost tax revenue and weakened regulatory oversight.

Indian crypto users execute nearly three-quarters of their crypto volume offshore, around $6.1 billion (₹51,252 crore), with just 27.33% remaining on domestic platforms, according to a report from crypto tax platform KoinX.

Finance Minister Nirmala Sitharaman is set to present her ninth consecutive budget on Sunday, a first in over two decades, with the crypto industry watching for relief from a tax regime that has gutted domestic trading volumes and pushed activity to foreign exchanges accessed via VPNs.

Despite ranking first in grassroots crypto adoption according to Chainalysis’ figures, India’s tax-heavy, policy-light approach has created a regulatory limbo that contrasts with structured frameworks emerging across Asia. 

“India’s VDA ecosystem is at a pivotal stage, with growing adoption across the country; however, the current tax framework presents challenges for retail participants by taxing transactions without recognising losses, creating friction rather than fairness,” Ashish Singhal, co-founder of crypto exchange CoinSwitch, told Decrypt.

The three broad requests for the 2026 Budget include tax rationalisation through “reduced Tax Deducted at Source (TDS) and allowing loss set-offs; a regulatory mechanism for the sector; and encouraging blockchain adoption, both permissioned and permissionless,” Dilip Chenoy, Chairman of Bharat Web3 Association, told Decrypt.

The 2022 tax hammer

In February 2022, the government announced a 30% tax on crypto income, with no deductions or exemptions.

“No deduction in respect of any expenditure or allowance shall be allowed while computing such income except cost of acquisition,” Sitharaman noted in her Budget 2022 presentation.

The minister specified that gifting of virtual digital assets would be taxed at the recipient’s end, while losses could not be set off against any other income. Investors couldn’t show losses from price drops or hacking incidents to offset taxation on profits.

The 1% TDS has hammered high-frequency traders and liquidity providers who operate on thin margins, making their business models unsustainable on domestic platforms.

The regime tightened in the 2025 Union Budget, when undisclosed crypto gains were brought under Section 158B of the Income Tax Act, enabling retrospective audits on transactions dating back 48 months. 

Investors who failed to report gains face a 70% penalty on unpaid taxes.

Rationalisation, Not Rollback

A nationwide survey done by CoinSwitch revealed deep dissatisfaction with the current crypto tax framework. 

Nearly 66% of the 5,000 participants consider the tax regime unfair, with 53% describing it as “very unfair,” and about 59% report reduced participation due to taxation, according to the report.

Over 80% seek changes in the upcoming Union Budget, 48% seek a lower tax rate than 30%, 18% want the ability to set off losses, 16% want reduced TDS, and a strong 61% favour taxing crypto similarly to equities or mutual funds.

“A reduction in TDS on VDA transactions from 1% to 0.01% could improve liquidity, ease compliance, and enhance transparency while preserving transaction traceability,” Singhal said, adding that increasing the TDS threshold to about $5,444 (₹5 lakh) could shield smaller investors from bearing an outsized tax burden.

Meanwhile, CA Sonu Jain, chief risk and compliance officer at 9Point Capital, told Decrypt the current structure has “failed its dual objectives of tracking transactions and discouraging speculation.”

“Instead, it has resulted in a near-complete migration of VDA activity to offshore platforms, where transactions are neither effectively trackable nor regulated under Indian law,” Jain said.

“Ironically, the compliance burden has fallen disproportionately on law-abiding taxpayers who continued using regulated platforms, and these users have faced increased tax notices, scrutiny, and enforcement actions, which have created a perception of distrust towards honest taxpayers,” he said.

“What India needs right now is a fair, trust-based tax and regulatory framework. Crypto is a new asset class, and without trust between taxpayers and the Revenue, enforcement will remain inefficient and counter-productive,” he added.

Jain called for revisiting how crypto losses are treated under Section 115BBH, noting they should align with the taxation of shares and securities. 

He also suggested replacing the 1% TDS with information-based reporting systems like Statement of Financial Transactions, which are already used in capital markets.

“A formal regulatory framework, at least for consumer protection and platform accountability, is essential to restore confidence, bring activity back onshore, and improve long-term tax compliance,” he added.

Aishwary Gupta, Global Head of Payments & RWAs at Polygon Labs, told Decrypt the industry seeks “pragmatic policy reset balancing innovation with safeguards.”

He also pointed to TDS reduction as a potential lever, echoing Singhal’s view that it could ease liquidity constraints and reduce incentives for offshore trading.

He said there is a strong case to “revisit India’s flat 30% tax on crypto gains and allow loss set-offs,” saying it would bring VDAs closer to the tax treatment of traditional financial assets.

Aside from tax concerns, the real priority is regulatory clarity, Gupta added, urging India to support stablecoin payments and asset tokenisation under existing payments and securities frameworks rather than crypto-specific rules.

Enforcement Failures

Earlier this month, tax authorities presented concerns to the parliamentary standing committee of finance, citing enforcement challenges including borderless transfers, pseudonymous addresses, and transactions outside regulated banking channels, according to a Times of India report.

“The Finance Ministry wants to curb decentralisation, privacy-focused systems, and offshore exchanges; the FIU and Income Tax Department are on the same page,” a source told Decrypt at the time.

Global Divergence

India’s punitive stance contrasts with other major economies, and other Asian jurisdictions like Japan and Hong Kong have moved toward structured licensing regimes to attract digital asset businesses.

India’s Economic Affairs Secretary Ajay Seth acknowledged early last year that India is reconsidering its crypto stance following major global shifts.

However, the discussion paper on digital assets, originally set for a September 2024 release, remains delayed.

“The deeper policy risk is that sustained opposition without a parallel regulatory pathway will push innovation, capital, and talent offshore, leaving India as a consumer and tax collector of crypto activity rather than a rule-setter,” Raj Kapoor, founder and CEO of the India Blockchain Alliance, previously told Decrypt.

Despite collecting approximately $5.2 million (₹437.43 crores) through crypto taxation, India lacks meaningful regulatory frameworks to protect users or foster innovation.

As Sitharaman prepares to present the Union Budget 2026, the crypto industry remains cautiously hopeful that the government will recognize structural flaws and consider reforms balancing revenue with investor protection and competitiveness of India’s onshore crypto markets.