Whalesbook
The existing tax structure, implemented with the 2022 budget, was designed to contain speculation and create transaction traceability. However, the policy's consequences have sparked a debate on its efficacy, prompting calls from the domestic crypto industry for a more balanced approach. The primary objective of any proposed changes would be to repatriate trading volumes to onshore, regulated platforms and enhance the government's visibility into the digital asset ecosystem.
### The Economic Drain of High Taxation
The core catalyst for the policy review is the demonstrable shift of economic activity away from domestic exchanges. Since the introduction of the 1% TDS, trading volumes on Indian platforms have declined sharply. The TDS, while manageable for long-term investors, has severely impacted high-frequency traders and liquidity providers who operate on thin margins, rendering their business models unsustainable on domestic platforms. This capital flight not only represents a loss of potential tax revenue from the 30% gains tax but also weakens the Indian digital asset market by creating thinner order books and reducing liquidity. The migration to offshore platforms, often accessed via VPNs, undermines the very AML and KYC frameworks the government has strengthened through the Financial Intelligence Unit (FIU).
### A Shifting Global and Domestic Landscape
India's punitive tax stance is increasingly at odds with the regulatory approaches of other major economies. Jurisdictions in Asia like Singapore, Japan, and Hong Kong have moved towards creating structured licensing and regulatory regimes to attract digital asset businesses. Globally, nations are adopting varied strategies, from treating crypto as property with graduated capital gains taxes, like in the U.S., to offering tax exemptions if assets are held for more than a year, as seen in Germany. This global pivot towards regulatory clarity contrasts with India's tax-heavy, policy-light approach, risking a loss of talent and innovation to more favorable markets. Industry executives contend that while the priority has shifted from mere tax cuts to establishing a clear and comprehensive regulatory framework, adjusting the tax levers is a critical first step.
### The Path Forward in Budget 2026
Industry consensus points toward two primary areas for reform in the upcoming budget: the TDS rate and the treatment of losses. Stakeholders are advocating for a significant reduction in the TDS, with proposals ranging from 0.01% to 0.1%. This adjustment is seen as a way to reduce friction for traders and restore liquidity to domestic exchanges without eliminating the transaction trail. A second key demand is to allow for the offsetting of losses from the sale of digital assets against gains, a standard feature for other asset classes. The current rule, which disallows loss set-offs, can lead to investors facing tax liabilities even when they have incurred overall net losses. Policymakers are expected to weigh these changes against the original goals of financial stability and risk mitigation as they formulate the final budget.