India’s cryptocurrency sector, once a burgeoning hub of innovation and investment, is now grappling with stringent regulatory measures that threaten to stifle its growth. While the government’s cautious approach aims to mitigate financial risks and ensure consumer protection, it has inadvertently created an environment that hampers innovation, drives talent abroad, and places Indian startups at a competitive disadvantage.
Overview of India’s Crypto Regulatory Landscape
India’s approach to cryptocurrency regulation has been a journey marked by jolting shifts, regulatory experimentation, and ongoing debate. India’s stance on cryptocurrency has historically been cautious, with a focus on curbing speculative trading and protecting consumers from potential financial risks.
In 2018, the Reserve Bank of India (RBI) took a firmly defensive stance, imposing a blanket ban on banks facilitating transactions involving cryptocurrencies. This effectively crippled the nascent industry, forcing many startups to either pivot or shut down entirely.
Related: Does Crypto Truly Pose Risks to India’s Financial Stability?
However, the Supreme Court of India overturned this ban in a landmark decision in March 2020, asserting that the RBI had not fully considered less invasive measures, such as prohibiting only anonymous virtual currencies. The Court deemed the circular “manifestly arbitrary, based on non-reasonable classification, and imposes disproportionate restrictions,” providing a critical lifeline to the sector and sparking a wave of renewed interest and investment.
However, this revival was short-lived, as the government introduced a steep tax on cryptocurrency in India in 2022, imposing a flat 30% tax on profits from virtual digital assets (VDAs). This flat tax is significantly higher than the progressive capital gains taxes found in regions such as the United States and the European Union, where long-term investors typically benefit from more favourable tax treatment.
For instance, U.S. capital gains tax rates range from 0% to 20%, depending on income, while the EU’s rates vary widely but are generally lower for longer holding periods. In contrast, India’s 30% crypto tax applies regardless of holding duration, discouraging long-term investment and effectively pricing out smaller investors. To add to this financial strain, the government also introduced a 1% Tax Deducted at Source (TDS) on all crypto transactions, impacting liquidity and trading volumes as it applies to every buy or sell order.
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Regulatory pressures further intensified in March 2023 when the Prevention of Money Laundering Act (PMLA) was amended to include VDAs. This move brought crypto exchanges under the same stringent anti-money laundering (AML) and Know Your Customer (KYC) norms as traditional financial institutions. While these measures are essential for combating fraud and ensuring financial stability, they also impose significant compliance costs on businesses, potentially stifling innovation.
Despite these piecemeal regulations, India still lacks a comprehensive legal framework for cryptocurrencies, unlike the U.S., which has a more structured approach under the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). India’s fragmented approach creates regulatory uncertainty, deterring institutional investors and stalling domestic innovation. This has led some analysts to speculate whether India is reviewing its strict policy stance on cryptocurrencies due to global policy shifts, as other countries adopt more progressive frameworks to attract crypto businesses.
Impact of High Taxation and Compliance Burdens
India’s current crypto tax regime is one of the most stringent globally, creating significant challenges for traders, investors, and businesses. The combination of a 30% flat tax on crypto gains and a 1% Tax Deducted at Source (TDS) on all transactions has not only dampened market sentiment but also raised serious concerns about the long-term viability of the industry.
Unlike traditional equity investments, where long-term holdings benefit from lower tax rates, crypto investors in India face a blanket rate regardless of holding duration. This sharp contrast has driven many traders to seek alternatives outside the country, looking for more favourable tax environments.
A survey by Mudrex found that 85% of respondents support a revision of the current tax on crypto in India, reflecting widespread dissatisfaction. Over 67.5% of these investors pointed to the 30% flat tax as a significant barrier, arguing that it discourages retail participation and long-term investment. This is particularly concerning for an industry that thrives on speculative capital and rapid innovation.
Adding to the complexity is the 1% TDS on every crypto transaction, regardless of profit or loss. This levy, intended to track transactions for tax purposes, has significantly impacted trading volumes. For instance, trading volumes on Indian exchanges dropped by over 70% within a month of this rule taking effect in 2022, highlighting its chilling impact on liquidity and market depth. This TDS also effectively locks up capital, reducing traders’ flexibility and forcing them to constantly manage cash flow for tax purposes. In a market where speed and liquidity are crucial, this can be a major disadvantage.
Moreover, unlike equity markets where investors can offset losses against gains to reduce their tax burden, India’s crypto tax structure offers no such relief. According to the Mudrex survey, nearly 89.6% of respondents believe this lack of loss offset is a critical flaw in the current system. This oversight not only discourages risk-taking but also amplifies the financial hit from market downturns, further deterring investment.
Reflecting this growing frustration, the Indian crypto community has become increasingly vocal about the need for change. The #ReduceCryptoTax movement, which trended on X (formerly Twitter) in 2024, is a clear sign of this sentiment, with many industry leaders and investors calling for a more balanced approach. They argue that high taxes and stringent regulations are stifling innovation, prompting calls for the government to reconsider India’s stance on cryptocurrency to align with evolving global trends.
Just In – #ReduceCryptoTax trends on X as Indian Crypto community urges the government to relook at current crypto tax rules.
1) Flat 30% tax
2) 1% TDS deduction on every trade
3) No loss set off pic.twitter.com/5cE3lPIrpG— Crypto India (@CryptooIndia) January 13, 2024
Startups and Talent Migration to Crypto Hubs
Faced with regulatory uncertainty, steep taxes, and compliance burdens, many of India’s most promising cryptocurrency startups and professionals are relocating to more supportive jurisdictions, such as Dubai, Singapore, and Switzerland. These regions have crafted regulatory environments that actively encourage innovation rather than stifle it, sharply contrasting India’s fragmented approach.
For example, Dubai’s establishment of the Virtual Assets Regulatory Authority (VARA) in 2022 marked a significant shift in how crypto businesses are governed.
Today, we approved the virtual assets law and established the Dubai Virtual Assets Regulatory Authority. A step that establishes the UAE’s position in this sector. The Authority will cooperate with all related entities to ensure maximum transparency and security for investors. pic.twitter.com/LuNtuIW8FM
— HH Sheikh Mohammed (@HHShkMohd) March 9, 2022
This world-first dedicated crypto regulator provides clear guidelines, flexible licensing options, and a supportive ecosystem, making it a magnet for blockchain entrepreneurs.
This proactive stance has already drawn companies like WazirX, which relocated its operations to Dubai, attracted by the UAE’s forward-thinking policies and deep-pocketed investor base. The reasons for this talent and capital migration are clear. High taxes, including the 30% flat tax on gains and the 1% TDS on every transaction, have made it financially challenging for startups to operate profitably in India.
This is particularly true for smaller firms that rely on high trading volumes and tight profit margins. In addition, the lack of clear, supportive regulations has created a sense of unpredictability that is incompatible with Web3’s fast pace. In contrast, countries like Singapore offer tax minimization options and stable regulatory frameworks that provide businesses the clarity they need to scale, making them highly attractive to crypto founders.
This talent flight isn’t just a loss for the crypto industry; it’s a setback for India’s broader tech ambitions, as it threatens to erode India’s competitive edge in the global fintech and blockchain sectors. Nations like Switzerland and the UAE, which offer tax incentives and clearer regulatory pathways, are increasingly seen as more attractive destinations for venture capital and high-growth startups.
India’s Web3 dilemma is draining local talent and redirecting mouth-watering amounts of investment capital overseas, potentially slowing the country’s broader technological progress.
Potential Reforms and the Path Forward
Notwithstanding, there is a growing recognition that a more balanced approach is essential for the country to remain competitive in the global digital economy. Public pushback on the current framework, characterized by high tax rates and strict compliance requirements, has led to calls for meaningful reforms.
One of the most frequently proposed changes is to reduce the current 1% Tax Deducted at Source (TDS) on all crypto transactions to a more manageable 0.01%. This adjustment could address one of the biggest pain points for traders and investors, potentially reversing the sharp decline in trading volumes seen since the tax was introduced.
Additionally, there is a strong push for a comprehensive regulatory framework that clearly defines the status of digital assets, moving away from the current piecemeal approach. Such framework would reduce the legal ambiguity surrounding crypto businesses, encourage innovation, and attract investment by providing much-needed clarity on tax obligations, investor protections, and anti-money laundering (AML) requirements.
Encouragingly, there are signs that the Indian government is beginning to reconsider its stance. In early 2025, government officials hinted at a possible review of the country’s crypto policies, acknowledging the need to strike a better balance between risk management and innovation. This u-turn suggests that policymakers are becoming more receptive to the idea of creating a regulatory environment that can support the sector’s growth while protecting consumers and maintaining financial stability.
For India to truly harness the potential of blockchain and digital assets, it will need to adopt a regulatory framework that encourages experimentation, supports startups, and attracts global investment. This means rethinking the current tax structure, simplifying compliance requirements, and building a more predictable regulatory environment.
Ultimately, the choice is clear: either embrace the innovation and economic potential of the cryptocurrency sector or risk being left behind by more agile, forward-looking economies. With the right reforms, India can reclaim its position as a leader in the global digital economy, rather than watching its brightest minds and most promising startups thrive elsewhere.
Disclaimer: This article is intended solely for informational purposes and should not be considered trading or investment advice. Nothing herein should be construed as financial, legal, or tax advice. Trading or investing in cryptocurrencies carries a considerable risk of financial loss. Always conduct due diligence.
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