As the Indian government prepares to present the Union Budget for the fiscal year 2025-26, the cryptocurrency industry is abuzz with anticipation. Stakeholders are hopeful for reforms that could provide much-needed clarity and relief in the taxation of virtual digital assets (VDAs). The current crypto tax regime, introduced in 2022, has been a point of contention, and industry players are eager for adjustments that could foster growth and innovation in the sector.
In 2022, the Indian government implemented a 30% tax on income from VDAs, treating them similarly to winnings from gambling and lotteries. Additionally, a 1% Tax Deducted at Source (TDS) was imposed on all crypto transactions exceeding ₹10,000. These measures were intended to bring transparency and accountability to the burgeoning crypto market. However, they have also led to significant challenges for investors and exchanges alike.
The high tax rate and TDS have been criticized for stifling trading volumes on domestic platforms. Many users have migrated to offshore exchanges to avoid these taxes, resulting in a loss of revenue for the Indian government. According to industry estimates, the introduction of the 1% TDS led to an estimated loss of $420 million in potential government revenue due to the migration of Indian crypto traders to overseas platforms.
Furthermore, the inability to offset losses against gains in VDA transactions has been a significant deterrent for investors. Unlike other asset classes, where losses can be set off against gains to reduce tax liability, the current crypto tax framework does not permit this, leading to higher effective taxes on investors.
As the Budget 2025-26 approaches, the crypto industry has outlined several key expectations:
Reduction in TDS Rate: Industry leaders are advocating for a reduction in the TDS rate from 1% to 0.01%. They argue that a lower TDS would improve tax compliance, prevent capital flight, and bring more transactions within the tax oversight mechanism.
Ability to Offset Losses: There is a strong demand for allowing the offsetting and carrying forward of losses from VDA transactions. This change would align the crypto market with other financial markets, providing a fairer tax environment for investors.
Reevaluation of the 30% Tax Rate: Stakeholders are urging the government to reconsider the flat 30% tax rate on crypto gains. They propose aligning it with the tax rates applicable to other capital assets to ensure parity and encourage investment in the sector.
Inclusion of Offshore Platforms in TDS Mandate: To curb the migration of users to foreign exchanges, there is a call to expand the scope of the TDS mandate to explicitly include offshore platforms. This move could level the playing field for domestic exchanges and ensure better tax compliance.
Establishment of a Self-Regulatory Organization (SRO): The industry is advocating for the creation of an SRO for the crypto and blockchain sectors. Such a body could provide standardized regulatory frameworks, ensuring clarity and unlocking numerous opportunities on a global scale.
Creation of Sandboxes for Startups: To foster innovation, there is a proposal for the creation of sandboxes that would offer a protected environment for startups in the crypto and blockchain space. This initiative could stimulate growth, generate employment, and position India as a leader in decentralized finance and blockchain technology.
The Indian government's approach to cryptocurrency has been cautious, with concerns about potential risks to financial stability and investor protection. However, there have been indications of a willingness to adopt geography-agnostic regulations for VDAs, signaling a readiness to embrace the opportunities presented by the digital assets revolution.
Globally, there is a trend towards more nuanced regulation of cryptocurrencies, with countries striving to balance innovation with risk management. India's upcoming budget presents an opportunity to align with international best practices, fostering a conducive environment for the crypto industry while safeguarding the interests of investors.
Implementing the proposed tax reforms could have several positive outcomes:
Increased Investor Participation: Lower taxes and the ability to offset losses could attract more investors to the crypto market, enhancing liquidity and market depth.
Reduction in Capital Flight: Including offshore platforms in the TDS mandate and reducing tax rates could discourage users from migrating to foreign exchanges, retaining capital within the country.
Stimulated Innovation: Establishing an SRO and creating sandboxes could provide a structured environment for startups, leading to technological advancements and job creation in the blockchain and crypto sectors.
As the Union Budget 2025-26 approaches, the cryptocurrency industry remains hopeful for reforms that could provide clarity and foster growth. Addressing the current challenges in the tax regime and establishing supportive regulatory frameworks could position India as a global leader in the digital asset space, unlocking the full potential of this transformative sector.