Why India needs to rethink crypto taxation in Budget 2026

India’s engagement with crypto is no longer a question of adoption. It is a question of policy design. Millions of Indians began participating in digital assets around 2021, leading the government to introduce a tax framework in 2022 aimed at transparency and accountability.

Four years on, the market has evolved rapidly both in scale and maturity. Global crypto markets are moving towards clearer and more balanced regulatory approaches. In India, this evolution offers an opportunity to review whether the current tax framework remains aligned with its original objectives.

Budget 2026 provides a timely moment to make that assessment and recalibrate policy in a way that supports regulatory compliance, tax revenue, and national interests.

The unintended impact of 1% TDS

In 2022, the government introduced a 1% Tax Deducted at Source (TDS) on every crypto transaction, along with a 30% flat tax on gains. It drove Indian users to offshore and unregulated platforms. Between 2022 and late 2025, Indians traded more than Rs 10 lakh crore on overseas exchanges. Over 90% of Indian crypto trading now happens on such offshore platforms.

During this period, the government collected just Rs 1,095 crore in TDS, while estimates suggest that about Rs 36,000 crore in potential tax revenue went uncollected. A Delhi-based think tank has projected cumulative losses of around Rs 11,000 crore already, with another Rs 39,971 crore at risk over the next five years, if things don’t change.

The current tax policy protects no one. The government loses visibility and tax revenue, and the user loses safety.

An estimated five million Indian users now trade on platforms that do not follow Indian KYC, AML, or reporting rules. Many operate through peer-to-peer networks that sit completely outside FIU-India oversight.

Recent media reports have highlighted how these networks have become conduits for fraud, illicit finance, and money laundering, often targeting retail investors who have little recourse when something goes wrong.

When legitimate users are pushed out of the system, illegitimate actors move in.

TDS was meant to create traceability. High TDS is pushing users off the radar, not onto it. We are effectively subsidising the offshore grey market. When policy pushes activity outside the system, the country loses tax, visibility, and consumer protection—all at once.

A strategic loss for India

This comes at a time when India is uniquely positioned to lead in Web3. We have more than 1,000 blockchain startups, around 75,000 crypto developers, and nearly 12% of the global Web3 talent pool. For three consecutive years, India has ranked at the top of grassroots crypto adoption.

Blockchain alone is estimated to add over $1 trillion to India’s GDP by 2032.

Yet today, entrepreneurs are increasingly choosing to operate from Dubai, Singapore, and the United States. The UAE offers zero personal income tax and zero capital gains tax on crypto. The US is now treating Bitcoin as a strategic asset. These countries are not just competing for crypto volumes. They are competing for future financial infrastructure.

What Budget 2026 must do

The solution does not lie in weakening oversight; it lies in making compliance work.

First, TDS must be reduced from 1% to 0.01% and applied uniformly across all platforms serving Indian users. A low TDS preserves transaction traceability, which was the original policy goal, without destroying liquidity or capital efficiency. When friction falls, users return to regulated Indian exchanges, restoring visibility for regulators and revenue for the exchequer.

Second, crypto gains should be taxed under income tax slabs, and not at a flat 30% rate. A person earning Rs 50,000 should not face the same tax burden as someone in the highest bracket. Aligning crypto taxation with other asset classes supports responsible, long-term investing and removes the incentive to hide activity offshore.

Third, Web3 businesses must be allowed loss offsetting and standard deductions. No industry can function if it is taxed on gross outcomes rather than net reality. Innovation requires capital, experimentation, and risk. The tax system should recognise that.

Compliance and growth go together

Indian exchanges already operate under FIU registration, PMLA, KYC, and AML requirements. This is a strong foundation, but compliance only works when economic activity remains inside the system.

Today, compliant Indian exchanges follow KYC, AML, and tax rules, while offshore players do not. That is not a level playing field. If a platform serves Indian users, it should follow Indian rules.

Lower, uniform TDS and rational capital-gains taxation would bring users back to FIU-registered platforms. That gives the government visibility into flows, suspicious activity, and actual income. Today, we get none of that because the market has been pushed underground.

With pragmatic reform, India can bring this industry back home and ensure that the next phase of global finance is built here, not exported elsewhere.

Sumit Gupta is the Co-founder of CoinDCX