As preparations for Union Budget 2026 gather pace, the taxation of virtual digital assets (VDAs) has once again come into focus. Since 2022, India has adopted a strict tax-first approach to crypto assets, characterised by high tax rates, transaction-level levies, and limited flexibility for investors.
Industry participants are not seeking deregulation. Instead, the current set of expectations centers on calibration: reducing friction, improving transparency, and aligning crypto taxation more closely with broader capital market principles, while retaining oversight.
This note sets out the key proposals being discussed, the rationale behind them, and what taxpayers and platforms should watch for.
1. TDS on Crypto Transactions: The Case for a Reset
Current position
With effect from 1 July 2022, Section 194S mandates a 1 percent tax deducted at source (TDS) on every transfer of a virtual digital asset. The obligation applies transaction-by-transaction, irrespective of profit or loss.
Industry concern
Market participants argue that:
- A 1 percent TDS on gross transaction value materially affects liquidity
- High-frequency or active traders face capital lock-in
- Trading activity has shifted to offshore platforms, reducing onshore visibility
This outcome runs counter to the original intent of TDS as a tracking mechanism rather than a revenue-generating levy.
Proposal under discussion
- Reduce TDS from 1 percent to a nominal rate, such as 0.01 percent
- Retain reporting and traceability without impairing market functioning
From a compliance perspective, a lower TDS may improve disclosure and bring more activity back within the domestic reporting net.
2. Flat 30 Percent Tax on Crypto Gains: Review of Structure
Current position
Under the framework introduced in Budget 2022:
- All profits from VDAs are taxed at a flat 30 percent
- Holding period is irrelevant
- No distinction between short-term and long-term gains
- The regime mirrors the taxation of winnings from lotteries or gambling
Why this is contentious
Stakeholders argue that:
- Crypto assets are being taxed differently from other investment assets
- Long-term investors receive no benefit for extended holding
- The structure discourages patient capital and formal participation
While the government has consistently stated that taxation does not imply recognition or endorsement, the economic impact of this structure is now more visible.
Suggested direction
Some industry voices have proposed:
- A capital-gains-based framework rather than a flat-rate model
- Differentiation based on holding period
- Alignment with how other market-linked instruments are treated, without diluting safeguards
Any such change would require careful balancing of revenue considerations and policy signalling.
3. Loss Set-Off: A Structural Asymmetry
Current position
Losses from VDAs:
- Cannot be set off against gains from any other asset class
- Cannot be set off even against gains from other VDAs
- Cannot be carried forward
Tax is therefore applied on gross profitable transactions, not net outcomes.
Practical impact
This creates an asymmetric regime where:
- Gains are fully taxable
- Losses are economically real but tax-irrelevant
From a tax design perspective, this departs from how most asset classes are treated and can overstate effective tax incidence.
Industry proposal
- Permit loss set-off within the same asset class, that is, crypto-to-crypto
- Continue to prohibit cross-asset set-off, if required for policy reasons
- Tax only net realised gains over a defined period
This would not reduce transparency, but would improve perceived fairness.
4. Regulatory and Classification Clarity
Current position
The government has repeatedly stated that:
- Cryptocurrencies are not regulated as legal tender or financial instruments
- Taxation applies regardless of regulatory status
However, in practice, the absence of formal classification creates uncertainty around:
- Reporting obligations
- Valuation
- Treatment across different fact patterns
- Consequences of non-disclosure or misclassification
Why clarity matters now
With:
- Enhanced data-sharing
- Increased scrutiny of foreign assets
- Greater focus on AIS and transaction-level reporting
Ambiguity increases compliance risk for investors and operational risk for platforms.
What stakeholders are seeking
Not recognition, but:
- Clear definitions of VDAs for tax purposes
- Consistent reporting expectations
- Alignment between tax provisions and compliance systems
Such clarity would allow taxpayers to plan disclosures responsibly and reduce inadvertent non-compliance.
What Taxpayers Should Do Meanwhile
Until any changes are announced:
- Assume existing rules continue unchanged
- Ensure full disclosure of VDA transactions in the return
- Track TDS credits carefully
- Avoid relying on informal interpretations or expectations of relief
- Seek advice where cross-border or high-volume transactions are involved
Closing note
Budget 2026 represents an opportunity to refine, not reverse, India’s approach to crypto taxation. The proposals being discussed aim to reduce friction without weakening oversight, and to bring more activity back into the formal system.
Whether these expectations translate into legislative change remains to be seen. Until then, compliance with the current framework remains non-negotiable, and any planning should proceed on that basis.