Concerns Over Virtual Digital Assets in India
As India’s Union Budget is imminent, concerns regarding virtual digital assets are escalating. The country’s income tax department has aligned with the Reserve Bank of India, expressing worries about the difficulties posed by cryptocurrency that may impede the government’s capability to monitor and impose taxes on these digital transactions.
Challenges in Tracking Cryptocurrency
Reportedly, officials from the tax department conveyed their apprehensions to a parliamentary finance committee, highlighting the complexities associated with tracking cryptocurrency transfers. These complexities are facilitated by their inherent attributes such as anonymity, the ability to conduct borderless transactions, and operations beyond conventional banking systems. This lack of regulation creates significant enforcement hurdles.
A source disclosed to Decrypt that the Finance Ministry is keen on limiting the influence of decentralized platforms, privacy-centric systems, and offshore trading venues.
Furthermore, exchanges registered with the Financial Intelligence Unit (FIU) are now under a microscope due to concerns regarding crypto laundering, prompting the Ministry of Home Affairs to initiate thorough investigations. The tax agency has also raised alarms over irregular practices by centralized exchanges, including improper handling of customer funds, excessive leverage, and insider trading activities.
Institutional Trepidation Towards Cryptocurrencies
This unease reflects a broader institutional trepidation towards privately issued cryptocurrencies as Finance Minister Nirmala Sitharaman prepares for her ninth consecutive budget announcement on February 1. Despite the high taxation rate for crypto traders—30% income tax plus a 1% Tax Deducted at Source (TDS)—an unequivocal regulatory framework remains absent.
Instead, the government is pushing for a digital currency backed by the RBI, with Union Minister Piyush Goyal mentioning last October that steep taxes aim to protect users from unbacked crypto investments.
Upcoming Budget Presentation and Regulatory Challenges
The Cabinet Committee on Parliamentary Affairs has set the budget presentation date for February 1, 2026-27, despite it falling on a Sunday, with the parliamentary budget session starting on January 28. Tax officials have also pointed out the complexities related to cross-border crypto transactions, which complicate authority when multiple jurisdictions are involved, particularly with platforms located outside India or those not registered with the FIU.
In July, authorities confirmed plans to leverage AI and international data-sharing as part of the Crypto-Asset Reporting Framework, allowing them to reconcile TDS data from exchanges with individuals’ income tax returns and issue notifications for discrepancies over $1,200.
Industry Perspectives on Regulatory Resistance
Raj Kapoor, the founder and CEO of the India Blockchain Alliance, commented that the tax department’s resistance to broader crypto adoption reflects a deeper institutional discomfort with privately issued digital currencies. He cautioned that this stance does not provide a structured market approach; rather, it risks creating an environment of fear without providing necessary clarity, investor safeguards, or systemic oversight.
Under the last budget, undisclosed crypto gains were classified under Section 158B, allowing for retrospective audits and imposing penalties as high as 70%, while the existing 30% flat tax and 1% TDS remain unchanged, adversely affecting trading volumes. Kapoor warned of the potential long-term risks, suggesting that continued resistance without establishing a clear regulatory framework could drive innovation, investment, and talent away from India, turning the nation into merely a consumer of crypto instead of a leader in regulatory standards.
