2025 marked the year crypto went mainstream globally—stablecoins processed $46 trillion in annual transactions, blockchain throughput increased 100-fold, and over $175 billion flowed into Bitcoin and Ethereum exchange-traded products.
However, India’s virtual digital asset (VDA) ecosystem has remained constrained by what industry leaders describe as a “tax-and-deter regime” that pushes activity offshore rather than enabling domestic growth.
With India now home to over 100 million crypto users—the fastest-growing user base globally—industry stakeholders are calling for fundamental reforms to taxation, regulatory architecture, and compliance frameworks, arguing that these would position the country as a leader in the compliant crypto finance space.
The tax friction
The crux of industry frustration centres on India’s 2022 VDA tax framework: a 30% tax on gains with no provision for loss offset, coupled with 1% tax deducted at source (TDS) on every transaction.
“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,” says Ashish Singhal, Co-founder of CoinSwitch.
The transaction-level TDS mechanism—introduced as a stopgap measure before formal regulation materialised—has proved particularly damaging to market liquidity. Industry data suggests compliant trading volumes have migrated to offshore exchanges, weakening—rather than strengthening—oversight.
“The 1% TDS, for instance, has acted largely as a drain on liquidity rather than as an effective surveillance mechanism,” observes Vikram Subburaj, CEO of Giottus. “A calibrated reduction would retain audit trails while enabling legitimate trading activity to return to domestic platforms.”
Singhal proposes specific interventions: “A reduction in TDS on VDA transactions from 1% to 0.01% could improve liquidity, ease compliance, and enhance transparency while preserving transaction traceability. Raising the TDS threshold to Rs 5 lakh would help protect small investors from disproportionate impact.”
From deterrence to supervision
What’s evolved since 2022 is the regulatory landscape itself. The Financial Intelligence Unit (FIU) now provides robust oversight of VDA platforms. Industry participants argue this institutional maturation justifies revisiting the original tax architecture.
“Introduced in 2022 as a stand-in for regulation at that time, VDA taxation has since been complemented by strong oversight from FIU-IND and improved compliance. This Budget presents a great opportunity to revisit the framework in a manner beneficial to both investors and the government,” Singhal notes.
Some industry voices are advocating for more structural changes to how VDAs are taxed. Manhar Garegrat, Country Head – India at Liminal Custody, suggests replacing transaction-level withholding with “a VDA transaction tax, similar to the securities transaction tax in capital markets that achieves traceability while also generating predictable revenue.”
SB Seker, Head of APAC at Binance, frames the choice facing policymakers starkly: “A pragmatic framework focused on capital gains realised—with provisions for limited loss set off and removal on transaction level levies in favour of net-revenue generating corporate taxes instead—can improve fairness for retail participants and indicate to them India has moved past the tax-and-deter regime towards a fuller license-and-supervise one.”
Beyond TDS reduction, the inability to offset losses within the VDA category represents what industry participants describe as a fundamental distortion of economic reality.
“Tax symmetry is equally critical. Permitting loss set-off within the VDA category would ensure taxation reflects net economic outcomes rather than gross turnover,” argues Subburaj.
This asymmetry—taxing gains while disallowing loss recognition—creates situations where investors face tax liabilities even when their overall portfolio shows net losses, a treatment that differs markedly from other asset classes.
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Regulatory architecture
Tax rationalisation alone, however, won’t suffice. Industry leaders emphasise that sustainable growth requires comprehensive regulatory clarity, distinguishing between speculative trading and productive blockchain applications.
“The industry also hopes for clarity on the classification of crypto assets and a forward-looking regulatory framework that differentiates between speculative trading and genuine blockchain-based innovation such as tokenisation, decentralised finance, and Web3 infrastructure,” says Sathvik Vishwanath, Co-founder and CEO of Unocoin.
“A clear licensing regime for exchanges, custodians, and wallet providers would help build investor confidence and strengthen consumer protection.”
Abhay Agarwal, Founder of Getbit, calls explicitly for “a dedicated Crypto Bill as well as alignment of SEBI guidelines for companies that hold BTC on their balance sheets.”
An absence of such clarity has real economic consequences. Domestic platforms face operational uncertainties that offshore competitors don’t, creating competitive asymmetries that drain activity from India’s regulated ecosystem.
“If India intends to build FIU-aligned, traceable crypto markets at scale, transparency must be more economical than avoidance. At present, transaction-level frictions influence behaviour without proportionately strengthening oversight,” Subburaj says.
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The offshore drift
The pattern industry participants describe is straightforward: punitive domestic taxation, combined with regulatory ambiguity that pushes users, capital, and eventually enterprise adoption to jurisdictions with clearer rules—even when those jurisdictions have less sophisticated financial infrastructure than India.
“India’s crypto conversation has largely focused on enforcement and taxation, but the next phase needs to address market structure and sustainability,” says Garegrat. “The real question for Budget 2026 is not whether VDA should exist, but how regulated activity can be kept onshore, transparent, and economically viable.”
This offshore migration undermines the original policy intent. If the goal was enhanced oversight and revenue generation, the current framework appears to be achieving the opposite—reducing visibility into trading activity while constraining tax base expansion.
“Today, compliant Indian participants face friction that often pushes volumes offshore, weakening oversight rather than strengthening it,” Garegrat notes.
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Global context, domestic imperative
India’s policy choices occur against a backdrop of accelerating global adoption. While Indian users represent one of the world’s largest and fastest-growing crypto populations, the country risks becoming a consumption market for products and platforms developed, regulated, and domiciled elsewhere.
In 2025, the global crypto landscape saw institutional finance embrace digital assets at-scale. Traditional institutions, including Citigroup, Fidelity, JPMorgan, Mastercard, and Visa, now offer crypto products. Stablecoin transaction volumes approached those of established payment networks.
Against this maturation, India’s restrictive stance appears increasingly anomalous—particularly given the country’s strengths in technology talent and digital public infrastructure.
Seker observes, “A balanced regulatory environment that safeguards users, supports innovation, and ensures predictable taxation will help India convert high participation into durable economic value and reinforce its position as a leading fintech hub.”
What Budget 2026 could deliver
Industry expectations for the upcoming Budget centre on three interconnected priorities:
Tax rationalisation: Reducing TDS to levels that preserve traceability without destroying liquidity, enabling loss offset within the VDA category, and potentially, restructuring the overall tax approach to focus on net economic outcomes rather than gross transaction volumes.
Regulatory clarity: Publishing clear operating standards for VDA platforms, establishing licensing regimes for different categories of service providers, and differentiating between speculative trading and productive blockchain applications like tokenisation and Web3 infrastructure.
Institutional alignment: Providing guidelines for companies holding crypto assets on balance sheets, clarifying the treatment of different crypto asset types, and establishing consumer protection frameworks appropriate to the technology.
“Implementing these types of changes would keep capital in India, allow for rapid growth of the country’s capabilities in innovation, and give India a great opportunity to take on the role of a thoughtful and responsible leader of the emerging digital asset economy,” says Agarwal.
Vishwanath frames the opportunity in terms of India’s competitive positioning: “With the right policy balance, India has the opportunity to become a global hub for blockchain talent, attract foreign investment, and create high-skilled jobs while ensuring transparency and financial stability.”
Edited by Suman Singh
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