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Crypto taxation brings trust and regulation, but can also reduce liquidity and slow fintech growth if poorly designed.
India’s high tax and TDS rules on virtual digital assets have driven traders and startups to global markets.
MiCA and clear tax frameworks in the EU and US help fintech companies scale while balancing compliance and innovation.
Cryptocurrency has transitioned from being a fringe element to a central part of mainstream finance. It now powers payments, remittances, tokenized assets, and on-chain markets. As governments tighten tax rules, a sharper debate has emerged.
Many traders are questioning whether crypto taxation creates trust and a level playing field that helps serious fintech companies grow, or if it cuts volumes and pushes founders offshore. Outcomes depend on the tax rate, how reporting is handled, and whether rules stay predictable.
India remains one of the strictest markets. Gains from virtual digital assets are taxed at a flat 30%. Losses cannot be set off against other income. Additionally, a 1% tax is deducted at source and applies to each sale exceeding the set thresholds. These provisions were introduced in 2022 and still apply in 2025. The combination aims to create a clear audit trail and deter evasion.
In the United States, the Treasury and the IRS have finalized broker reporting rules that require platforms to report gross proceeds from digital-asset sales starting January 1, 2025, and cost basis from 2026. Later, Congress nullified the portion that would have applied the same obligations to decentralized finance “brokers.” Centralized platforms now face clearer reporting duties, while decentralized protocols remain outside that specific framework.
Across the European Union, the Markets in Crypto-Assets (MiCA) regime has taken effect in stages from late 2024 into 2025. MiCA is a licensing and market conduct rulebook, rather than a tax code, but it interacts closely with national tax and anti-money laundering rules. Several member states have issued aligned tax guidance alongside MiCA, so that crypto-asset service providers know how to classify and report their activities.
In the United Kingdom, HMRC guidance through 2025 continues to treat most disposals of crypto as subject to Capital Gains Tax, while activities like staking or mining can be taxed as income. Reporting thresholds have tightened and allowances have shrunk, lifting the compliance bar for both consumers and startups.
Clear tax rules can legitimize crypto in the eyes of banks, auditors, insurers, and large enterprises. When obligations are explicit, fintech startups find it easier to open accounts, secure payment rails, and win institutional customers. Predictability reduces perceived counterparty risk and lowers the “compliance discount” that often blocks partnerships with traditional finance.
Taxation can also improve data quality. With information reporting, authorities can match taxpayer filings to platform records. This helps deter fraud and reduces headline risk for compliant firms. Over time, a more transparent market draws in cautious customers who value safety and reliability, which supports sustainable growth for well-run startups.
Also Read: Crypto Tax Revamp: What Budget 2025 Means for Your Investments?
Poorly designed taxes can choke liquidity, the lifeblood of any marketplace. High headline rates and per-trade levies discourage trading, market making, and hedging. India’s 1% TDS has been repeatedly linked to sharp drops in domestic exchange volumes and active users since 2022. Analyses reported declines of roughly 97% in volumes and over 80% in active users from early 2022 to early 2024, alongside a visible migration to offshore venues. When liquidity dries up, spreads widen, user experience worsens, and unit economics deteriorate for local startups.
Complexity adds an invisible tax. Startups must establish rules for withholding, residency, and threshold checks, as well as multi-jurisdictional reconciliation. In the United States, months of uncertainty about whether DeFi participants would be treated as “brokers” forced engineering teams and lawyers to plan for multiple scenarios. Congress later removed the DeFi broker piece, but the time and money had already been spent, resources that early-stage teams can scarcely afford.
India’s framework sends a strong message against evasion and aims for traceability. A 30% flat tax on gains, no loss set-off, and a 1% TDS on each sale have also put stress on domestic platforms. Reports in 2024 and 2025 linked these rules to increased volume of flights overseas and to consolidation pressure on smaller exchanges. The policy conversation has begun to shift. The Central Board of Direct Taxes has engaged in a discussion on whether to recalibrate TDS and whether to allow loss set-offs within the virtual digital asset class. Authorities have also pursued probes into unaccounted crypto income. The direction of travel suggests an attempt to balance traceability with market vitality.
Industry voices in India continue to advocate a lower TDS rate to keep an audit trail without draining day-to-day liquidity. Claims that more than 90% of Indian retail trading shifted offshore under current rules are debated, but the market signal is clear. Startups have adjusted product roadmaps, slowed hiring, or targeted global users first, with India as a secondary market pending tax adjustments.
In the United States, standardized reporting for centralized platforms is likely to help mature exchanges and tax-tech providers. Firms that invest in compliance infrastructure can position themselves as safe, regulated gateways for institutions.
This can unlock higher-value clients and new revenue lines, such as qualified custody, tax statements, and enterprise integrations. The lingering uncertainty surrounding DeFi reveals the other side of the coin: policy whiplash can derail plans, necessitate rewrites, and prolong development cycles.
In the European Union, MiCA has sparked licensing projects across the bloc. Clear perimeter rules encourage banks and payment institutions to partner with crypto firms. The cost is significant: capital requirements, governance, and reporting standards are stricter. However, access to a 27-country market with fewer legal ambiguities can outweigh the overhead once a startup scales. For many founders, the EU now offers a coherent path from seed-stage product to institution-grade platform.
Tax rules shape product and data architecture. Every feature that moves value needs tax mapping. This includes classification as income or gains, acquisition-cost capture, fair-market-value snapshots, withholding logic, and exportable statements for customers and authorities.
Finance teams must reconcile platform-ledgers with jurisdiction-specific reports like 1099 forms or their equivalents. Legal teams track changing definitions of ‘broker’ and ‘crypto-asset service provider.’ The result is higher fixed costs and slower shipping speed. These factors tilt the field toward better-funded players and toward vendors that sell compliance as a service.
Evidence from India and elsewhere points to three helpful levers. Information reporting plus annual settlement generally preserves liquidity better than blunt per-trade withholding, except where withholding is essential. Allow loss set-offs within the same asset class to reflect real economic outcomes. Asymmetric loss treatment discourages market makers and hedgers who stabilize prices. Startups can then amortize compliance builds rather than rewrite systems after launch when rules shift.
These ideas do not reduce enforcement; they shift it to where it works best. Strong reporting, modern analytics, and targeted audits can raise compliance without killing healthy market activity. Policymaker consultations in India and the evolving US stance on DeFi reporting show that adjustments are being weighed, even if timelines vary.
Founders planning for 2026–2028 should assume more reporting, not less, and should design tax-aware data models from day one. Markets with clear but demanding regimes may offer better enterprise pathways.
India remains a vast opportunity, but large-scale consumer trading products are likely to stay constrained unless TDS and loss rules change. If recalibration arrives, domestic liquidity could rebound, restoring the growth flywheel for local fintechs while preserving traceability for the state.
Crypto taxes are neither entirely beneficial nor entirely damaging. Well-calibrated rules can strengthen trust, attract institutional partners, and support long-term growth. Poorly calibrated rules can drain liquidity and slow innovation.
The difference lies in rates, reporting design, and policy stability. Smart tax architecture will do more than raise revenue; it will decide where the next generation of crypto-native fintech startups choose to build.
1. How does crypto taxation affect fintech companies?
Crypto taxation creates regulatory clarity but can also increase compliance costs and reduce trading activity if taxes are too high or complex.
2. Why are Indian fintech startups concerned about current crypto tax policies?
India’s 30% tax on gains and 1% TDS on every crypto trade have reduced trading volumes and pushed users toward foreign platforms, affecting local fintech growth.
3. What is MiCA, and how does it impact fintech companies?
MiCA (Markets in Crypto-Assets) is a European regulatory framework that sets uniform rules for crypto service providers, helping fintech companies operate legally across EU countries.
4. Can losses from virtual digital assets be set off against other income?
In India, losses from virtual digital assets cannot be set off, while in other regions like the US and EU, capital gains rules often allow adjustments subject to conditions.
5. Does crypto taxation help make the market safer for users?
Yes, clear and fair taxation improves transparency, reduces fraud, and encourages banks and institutions to work with compliant fintech platforms, making the market safer and more trusted.
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