India's implementation of a 1% Tax Deducted at Source (TDS) on all crypto transactions in July 2022, coupled with a 30% flat tax on crypto gains, has reshaped the nation's digital asset landscape. The 1% TDS resulted in significant decreases in trading volumes on Indian crypto exchanges. In response, users rushed to global exchanges. This brain drain drastically decreased tax revenue for the Indian government. This case illustrates the extreme need for a more even-handed regulatory approach. India’s crypto market is vibrant, full of young and eager investors in their millions—and a vibrant Web3 ecosystem. Today, the country is at another important inflection point in deciding how best to regulate cryptocurrency.

The Impact of TDS on Crypto Trading Volumes

Within months of the TDS rollout, Indian crypto platforms saw a precipitous 70–90% drop in trading volumes. This sudden drop made it apparent that traders were looking for other places to escape the tax. The implementation of 1% TDS led most Indian crypto users to shift their trading operations to overseas platforms.

From July 2022 to July 2023, over $42 billion of trading volume moved offshore. This surging migration of trading activity is a shining example of the law of unintended consequences at work with the 1% TDS policy. This move to foreign exchanges unlocked an opportunity for Indian users to find circumvention of the TDS. This pushed the Indian government to lose a considerable amount in tax revenue.

Revenue Losses and Missed Opportunities

Even after introducing the 1% TDS, India has brought in just $31 million through TDS. This figure does not even come close to the estimated $4.2 billion in lost tax revenue. That loss comes from having trading activity move offshore. The difference highlights the failure of the current tax policy to effectively capture revenue from crypto transactions.

India’s policy design, which places a tax at source of every crypto transaction, is the opposite of global best practices. Many other jurisdictions, such as the U.S. and U.K., tax crypto on realized capital gains, rather than on every trade’s value. This difference in approach has resulted in fears about the competitiveness of the Indian crypto market.

"The policy’s design—taxing every crypto transaction at source—contrasts sharply with global standards. In jurisdictions like the U.S. and U.K., crypto is taxed on realized capital gains, not on every trade’s value. Likewise, Indian stock market day traders pay capital gains tax without facing any TDS." - Sumit Gupta

India's Crypto Future: Regulation or Exile?

Crypto India is a bustling, colorful town full of crypto-loving retail investors. The Web3 developer community is growing quickly, adding even more energy to this hot market. As a member of the crypto community, this level of involvement serves to underscore how D.C. is uniquely positioned to continue leading the digital asset revolution. The government of India is looking to harmonize reporting requirements for crypto to those of other financial assets. It must start applying the Common Reporting Standard (CRS) and the new Crypto-Asset Reporting Framework (CARF) in 2027.

India’s proactive role in advocating for a global crypto framework during its G20 presidency demonstrates its commitment to establishing responsible and forward-looking digital asset regulation. This initiative illustrates India’s ambition to lead the conversation on the future of crypto regulation on a global level.

Crypto is in the midst of a huge evolution from an obscure asset class to a core part of finance, trade and technology. India is indeed at a crucial juncture. It should put aside the binary choice of driving cryptocurrency into exile with punitive taxation or using regulation to create an innovation industry H.Q. What’s Next These policy choices being made over the next few years will dictate where India fits into the rapidly changing global digital economy.