Tax Turmoil: Why India's Crypto Rules Are Pushing Investors Offshore

Entrepreneur

17-05-2025

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If cryptocurrency were a guest at India's economic dinner table, it would no longer crash the party—it would now be seated, monitored, and asked to show its ID. With the 2025 Budget, India continued to forge a path for streamlined rules and regulations, along with a local dress code for exchanges in the USD 6.4 billion—and growing—digital asset sector. The global crypto m-cap, as per coin market cap, currently stands at approx. USD3.33 trillion. As of 2021, India topped the world in crypto ownership, with over 10.7 crore individuals invested in digital assets.
IMARC Group's data suggests that the domestic market could grow to over USD 13.9 billion in 2033 from USD 2.6 billion in 2024. The sector is finding takers across segments and every corner of the country—much like Nagpur-based Ashish Nagose, who believes this asset class could offer a financial cushion for his family-owned flower shop during a slump. India's stance on crypto is evolving—having varied views from the new Finance Secretary Ajay Seth, former RBI Governor Shaktikanta Das, and Finance Minister Nirmala Sitharaman.
The current crypto tax framework includes a 30 per cent tax on gains from virtual digital assets (VDAs), a one per cent TDS (tax deducted at source), along no ability to offset losses against other income. These measures have catapulted domestic investors to opt for overseas exchanges such as Binance, KuCoin, Coinbase, Bitget, and Delta Exchange.
Flocking To Foreign Exchanges
The one per cent TDS saw the migration of three to five million users to offshore platforms in 2023, according to Esya Centre, a Delhi-based tech policy think tank. Trades might prefer offshore exchanges for various reasons, including lower taxes, favourable regulations, or a wider range of available cryptocurrencies. "While the entry process (in India) is more streamlined than in many other countries, global platforms must first clear any pending dues and comply with existing financial obligations," shares Alankar Saxena, co-founder and CTO, Mudrex. Binance and KuCoin re-entered India after paying fines, while Coinbase secured FIU approval for a 2025 relaunch.
Recently, Binance came under fire for potential tax evasion as the Income Tax (IT) department sought details on whether the mandatory TDS was being collected or not. Investors have been asked to either provide TDS proof or give justification for failing to do so.
Offshore Vs Domestic Players
The majority of Indian users on offshore platforms tend to escape TDS, this is either done on purpose or ignorance. Meanwhile, Indian platforms such as Mudrex or CoinSwitch take responsibility for deducting and sending the TDS amount to the government, keeping users at ease. In December 2024, the Indian government uncovered Goods and Services Tax (GST) evasion amounting to INR 824.14 crore across 17 cryptocurrency exchanges. Among them, Nest Services Ltd — linked to the Binance Group — stood out with a staggering alleged GST evasion of INR 722.43 crore. India's crypto regulation remains functional but fragmented.
While it addresses certain aspects—such as taxing profits and applying GST or TDS—it lacks a comprehensive regulatory framework that mandates registration, licensing, or full compliance for all crypto platforms, particularly those based overseas.
"Without a clear-cut process for registration and tax collection, they are likely to be marked as noncompliant, and their users are also at risk of facing legal penalties," shares Avinash Shekhar, cofounder and CEO, Pi42. The TDS crackdown on Binance and others has been a wake-up call for investors. There has been a notable shift of retail cryptocurrency investors in India moving from offshore exchanges to domestic platforms.
"If you're trading in India, using a homegrown platform just makes things easier—faster customer support, better alignment with local rules, and fewer compliance hassles overall. It's like choosing a service that speaks your language—literally and legally," shares Balaji Srihari, vice president, CoinSwitch.
"Ultimately, building user trust is essential, and local exchanges are well-positioned to serve investor interests within the regulatory framework," echoes Saxena.
Ignorance Is Bliss?
Since 2022, industry players have voiced their hopes for a tax revision in pre-budget expectations but in vain. Shekhar feels that the update has not taken place due to the government "viewing it as a way to track and monitor cryptocurrency transactions rather than as a revenue categorising their transactions as "unexplained cash credit" as per the new Income Tax Act amendments and seeking a surged tax of 60-70 per cent. Koinx's founder clarified in one case that this happened due to the lack of buyer information like the PAN card on the user's end.
Often, investors use different usernames on crypto exchanges and bank accounts, leading to mismatches that make it difficult to verify transactions. Among crypto transactions, in P2P transactions, the buyer is responsible for deducting TDS and remitting it to the government. It is advised that Indian crypto traders should maintain a detailed record of generating tool." Srihari notes that the conversation on TDS reduction is far from static, "These things often take time, especially when balancing innovation with regulation in a dynamic space like crypto." How does the inability to offset crypto losses against gains distort market participation? Srihari explains, "In the stock market if you make a loss, you can set it off against future gains, which helps reduce your tax burden. But with crypto, you're taxed on the gains, but can't offset the losses—which can discourage participation, especially from serious investors or traders. It feels more like a one-sided deal and adds risk without cushion."
The Fine Print
The I-T department earlier sent notice to P2P (Peer to Peer) traders on platforms such as Koinx and TaxNodes, categorising their transactions as "unexplained cash credit" as per the new Income Tax Act amendments and seeking a surged tax of 60-70 per cent. Koinx's founder clarified in one case that this happened due to the lack of buyer information like the PAN card on the user's end. Often, investors use different usernames on crypto exchanges and bank accounts, leading to mismatches that make it difficult to verify transactions.
Among crypto transactions, in P2P transactions, the buyer is responsible for deducting TDS and remitting it to the government. It is advised that Indian crypto traders should maintain a detailed record of all the crypto transactions, including the KYC details of the counterparties to protect themselves from hefty penalties in the future.
Way Ahead
India is now reviewing its stance on crypto due to shifting attitudes towards virtual assets in other countries, primarily propelled by US President Donald Trump's crypto-friendly policy announcements. "If regulations keep getting tighter without encouragement for innovation, India can expect to lose even more talent and capital," says Shekhar. Saxena feels the government should establish sandboxes for blockchain startups to test decentralized applications (dApps), DAOs, and tokenized assets without immediate tax or regulatory burdens.