India's Income Tax Department (ITD) has formally raised significant concerns about the challenges of taxing and regulating cryptocurrencies in a presentation to the Parliament's Standing Committee on Finance. Officials highlighted that the core features of crypto—such as anonymous transfers, the use of offshore exchanges, and jurisdictional limitations—make detecting taxable income and recovering dues "virtually impossible."
The presentation, based on a report titled "A Study on Virtual Digital Assets (VDAs) and Way Forward," was attended by multiple agencies including the Financial Intelligence Unit (FIU), the Department of Revenue, and the Central Board of Direct Taxes (CBDT). Authorities pointed to specific enforcement gaps created by borderless transfers, pseudonymous addresses, and transactions occurring outside regulated banking channels or on platforms not registered with India's FIU.
The timing of the warning is critical, as it comes just weeks before Finance Minister Nirmala Sitharaman presents the Union Budget for 2026-27 on February 1. The government's institutional unease with privately issued crypto persists despite an existing heavy tax regime that imposes a 30% flat tax on crypto income and a 1% Tax Deducted at Source (TDS) on every transaction. This framework, while making trading legal, has been criticized for stifling activity without providing clear regulation.
Officials also flagged operational risks within the sector, noting that FIU-registered exchanges are under scrutiny due to crypto-laundering reports now being investigated by the Ministry of Home Affairs. The Tax Department has identified irregularities by centralized exchanges, including misuse of customer funds, extreme leverage, and insider trading.
Raj Kapoor, founder and CEO of the India Blockchain Alliance, told Decrypt that the ITD's opposition "should be read less as an isolated tax concern and more as a signal of India's broader institutional discomfort with privately issued digital assets." He warned that the current approach "risks creating a climate of fear without delivering clarity, investor protection, or systemic oversight," potentially pushing innovation and capital offshore.
In lieu of embracing private crypto, India is prioritizing its "RBI-guaranteed" digital currency (CBDC). The government views heavy taxation as a deterrent to prevent users from being "stuck" with unbacked crypto assets. For enforcement, authorities announced last July they would employ AI and global data-sharing under the Crypto-Asset Reporting Framework (CARF) to cross-match TDS data with income tax returns, issuing notices for discrepancies exceeding $1,200 (₹1 lakh).
The regulatory landscape remains in limbo. A much-anticipated discussion paper on crypto regulation, initially slated for September 2024, has been repeatedly delayed with no confirmed publication date as of January 2026.
