Author: Shourya Mahli, Faculty of Law, University of Delhi
ABSTRACT
Once a fringe invention, cryptocurrencies have developed into well-known financial products with a big impact on world economies. Governments and regulatory agencies are struggling with how to properly control and tax these digital assets as their use grows internationally. Significant changes have been made to India’s cryptocurrency tax system in recent years, especially when the 2022 Union Budget imposed a flat 30% tax on virtual digital assets (VDAs). Although stakeholders expressed worry about the burden of compliance, the absence of loss offset mechanisms, and the overall deterrent effect on innovation and investment in the crypto field, this step also signified legal certainty.
The many effects of cryptocurrency taxes in India are critically examined in this essay, with a focus on the wider fintech sector as well as individual investors. In order to emphasize the particular difficulties encountered by Indian policymakers, it also makes analogies with global standards. In addition to examining changing judicial interpretations on the categorization and handling of cryptocurrencies under the Income Tax Act, the article incorporates seminal case laws such Nangia Andersen LLP v. Union of India. This paper seeks to enhance the discussion of attaining a fair and efficient taxation policy that encourages compliance without impeding technological innovation through doctrinal analysis and case-based review.
INTRODUCTION
The advent of cryptocurrencies—decentralized virtual currencies driven by blockchain technology—has brought about a radical change in the digital economy. Once thought of as a fringe innovation, cryptocurrencies such as Bitcoin, Ethereum, and others have developed into widely used financial instruments that pose a threat to established legal frameworks, monetary policy frameworks, and financial systems. Like many other countries, India has witnessed a sharp increase in the use of cryptocurrencies, especially among young people and tech-savvy investors who are attracted to the promises of anonymity, decentralization, and large returns.
But this change has also presented politicians and regulatory bodies with previously unheard-of difficulties. Taxation is one of the most important facets of this legal ambiguity. The classification and taxation of these digital assets is a challenge for governments around the world. Are they securities, currencies, commodities, or something else? The cautious and developing regulatory approach in India culminated in the historic announcement to tax virtual digital assets (VDAs) in the 2022 Union Budget, which marked a sea change in the legal acceptance of cryptocurrencies.
Here we explore the taxation of cryptocurrencies in India by analyzing the legislative framework, judicial responses, comparative foreign laws, and the broader economic and legal implications. In doing so, it seeks to evaluate whether India’s current tax regime on crypto-assets fosters legal certainty and investor confidence or adds further complexity and compliance burden to an already volatile sector
LEGAL BACKGROUND
Prior to 2022, cryptocurrencies operated in a legal grey area in India. In 2018In 2020, the Supreme Court overturned the Reserve Bank of India’s (RBI) restriction on banking services for cryptocurrency transactions in the case of Internet and Mobile Association of India v. Reserve Bank of India. The Finance Act 2022 introduced Section 115, imposing a 30% tax on income from VDAs and 1% TDS under Section 194.
ANALYSIS
1. Impact on Investors:
The flat 30% tax rate discourages small investors and traders. Unlike equity markets, no deductions for cost of acquisition (except purchase cost) or set-offs against losses are allowed, making crypto trading less attractive.
2. Compliance Burden:
The 1% TDS on every transaction imposes a significant compliance burden on exchanges and traders. This may drive users towards foreign exchanges or peer-to-peer platforms, hampering transparency.
3. Effect on Startups and Innovation:
Web3 and crypto-based startups face increased uncertainty. High taxation and regulatory ambiguity may lead to a brain drain and relocation to more crypto-friendly jurisdictions like Singapore or Dubai.
4. Revenue Generation vs. Innovation:
While taxation aims at generating revenue and regulating the sector, over-regulation can stifle innovation in blockchain technology, which has applications beyond just currency—such as supply chain, healthcare, and legal tech.
Conclusion
The taxation of cryptocurrencies marks a crucial step toward legitimizing and integrating the digital asset ecosystem within the formal economy. However, this progress must be tempered with thoughtful and adaptive policymaking. While the government’s intent to regulate and tax the sector is understandable and necessary, it is equally important to avoid stifling innovation through overregulation or creating uncertainty through ambiguous compliance requirements. A balanced approach—fostering growth while ensuring accountability—will be essential to unlock the full potential of this emerging asset class in India.
Furthermore, the judiciary, as seen in Nangia Andersen LLP v. Union of India, must also interpret tax laws with clarity and fairness in this evolving domain. Going forward, consistent dialogue between industry stakeholders, tax authorities, and lawmakers is essential to build a tax regime that promotes growth while safeguarding public interest. A forward-looking approach will ensure India remains competitive in the global digital economy without compromising fiscal integrity.
SUGGESTIONS
India should introduce a comprehensive cryptocurrency law defining legal status, classification (commodity, asset, or currency), and usage.
Consider a progressive taxation model similar to equity to attract long-term investors.
Reduce the TDS rate or make it applicable only beyond a transaction threshold.
Provide clarity on international transactions and crypto earned through mining, staking, and airdrops.
FAQS
1. What is the current tax regime for cryptocurrencies in India?
The Government of India imposes a 30% tax on income from the transfer of virtual digital assets (VDAs) such as cryptocurrencies, with no deductions allowed except for the cost of acquisition. Additionally, 1% TDS (Tax Deducted at Source) is levied on transactions above a specified threshold.
2. How has taxation impacted the growth of the Indian crypto market?
The taxation framework, particularly the 30% tax and 1% TDS, has led to a significant decline in trading volumes, relocation of exchanges abroad, and a drop in investor participation, stifling innovation and market development in India.
3. Are there any legal challenges to crypto taxation in India?
Yes. In Nangia Andersen LLP v. Union of India, the petitioners challenged the constitutional validity of the taxation on VDAs, citing issues such as lack of clarity, arbitrary treatment, and discrimination under Article 14 and other provisions of the Constitution.
4. How does India’s crypto tax regime compare with global practices?
India’s crypto tax policy is relatively more stringent. Most developed countries offer clear regulations, capital gains-based taxation, and scope for deductions. India’s flat-rate tax with minimal exemptions places a heavier burden on investors and startups.
5. What are the potential reforms needed in India’s crypto taxation policy?
Experts recommend lowering the tax rate, clarifying regulatory definitions, allowing set-offs and deductions, and reassessing the TDS mechanism to promote a balanced ecosystem that protects investors while encouraging technological innovation and compliance.
