India's crypto regulation falls into a deadlock: the contradiction between a 30% high tax rate and enforcement difficulties

India’s tax authorities recently held an official meeting where concerns about cryptocurrency trading reached an all-time high. According to the latest reports, the Income Tax Department under the Central Direct Taxation Committee of India explicitly stated during the Parliamentary Finance Standing Committee meeting that the widespread use of offshore exchanges, DeFi tools, and private wallets makes tax tracking “almost impossible.” This reflects a deep contradiction in India’s crypto regulatory policy: on one hand, they want to collect taxes; on the other hand, they cannot.

Root Causes of Enforcement Difficulties

The issues pointed out by India’s tax authorities are quite straightforward. Cryptocurrencies possess three characteristics that make tracking a nightmare: anonymity, borderlessness, and near-instant value transfer. Users can completely bypass traditional regulated financial intermediaries and conduct cross-border transactions directly.

In cross-border scenarios across multiple countries and regions, tracking transaction paths and confirming actual holders for tax purposes becomes even more difficult. The jurisdictional issues arising from offshore virtual asset trading activities pose systemic challenges for Indian tax officials.

Policy and Reality Mismatch

India’s current crypto tax policy appears strict:

This set of policies has indeed brought considerable tax revenue to India. According to the latest data, India’s Financial Intelligence Unit (FIU) approved anti-money laundering registration for 49 cryptocurrency exchanges in the 2024-2025 fiscal year, including 45 domestic and 4 offshore platforms. FIU also fined violators a total of 2.8 billion rupees.

However, behind these figures lies an awkward reality: although Indian authorities permit cryptocurrency trading and even approved the return of international exchanges like Coinbase to the market in 2025, enforcement frameworks have not kept pace. High tax rates, inability to deduct losses, and 1% withholding on transfers are collectively suppressing market vitality rather than promoting healthy development.

Industry’s True Voice

CoinSwitch co-founder Ashish Singhal candidly states: under the current framework, losses from crypto trading cannot be deducted, leading to “friction rather than fairness.” This reflects a common industry sentiment—policy intentions are to regulate, but the result becomes a stumbling block for the market.

The “Gray Area” Dilemma in Regulation

The core issue with India’s crypto regulation is that the policy framework itself exists in a “gray area.” On one hand, the government seeks to generate tax revenue through high tax rates; on the other hand, it lacks effective enforcement tools to track offshore transactions and DeFi activities.

During the meeting, tax authorities admitted that although India has made progress in information sharing and inter-agency cooperation, these efforts are far from sufficient to support tax officials in effectively assessing and reconstructing complete transaction chains. In other words, policymakers know where the problems lie, but their tools are still inadequate.

The Path Forward for Balance

As India’s cryptocurrency adoption continues to rise and FIU keeps approving new exchanges, finding a balance between regulation and industry development has become a core challenge for the Indian crypto market.

Current trends suggest that India may need to make adjustments in two areas: first, improve enforcement tools, especially by investing more resources in cross-border transaction tracking and DeFi regulation; second, revisit tax policies to consider whether adjustments to tax rates or allowing loss deductions could stimulate market vitality. However, these adjustments are unlikely to happen in the short term.

Summary

India’s crypto regulation is caught in a classic policy paradox: wanting to collect taxes but unable to do so, wanting to regulate but lacking the means. A 30% flat tax rate and 1% transfer withholding tax sound strict, but in the face of offshore exchanges, DeFi tools, and private wallets’ flexibility, these policies seem somewhat powerless.

The real issue is not whether the tax rate is high or low, but that the regulatory framework is not yet prepared for this rapidly evolving industry. In this “gray area,” exchanges are registering, the market is growing, but enforcement difficulties remain a Damocles sword hanging over the market. The future direction of India’s crypto market largely depends on whether policymakers can break through this impasse.