As India's Union Budget 2026 approaches, the cryptocurrency industry is anticipating a pivotal shift towards regulatory clarity and tax rationalization, rather than the introduction of harsher measures. The current tax framework for Virtual Digital Assets (VDAs), which includes a flat 30% tax on gains and a 1% Tax Deducted at Source (TDS) on transactions, has been widely criticized for stifling market efficiency and driving trading activity to offshore platforms.
Industry expectations are centered on key reforms. Chartered Accountant Mohit Gupta of PNAM & Co LLP highlighted the major expectation of rationalizing the 1% TDS under Section 194S, stating the current rate has decreased liquidity, increased bid-ask spreads, and pushed traders offshore. The industry is hoping for a lower rate (0.01%-0.1%) or a higher threshold.
Data from KoinX's 'India’s Crypto Tax Story 2025' report underscores the urgency for change. The report, based on data from nearly 700,000 Indian crypto users in FY 2024-25, revealed that 49.09% of users ended the year with net capital losses. Despite this, many still paid taxes because current rules prohibit offsetting crypto losses against gains. Users with net losses of ₹1,178 crore still paid tax on ₹180 crore of taxable gains. Furthermore, over 30% of users had excess TDS deducted, requiring refunds.
Aishwary Gupta of Polygon Labs outlined specific areas for reform. Key expectations for Budget 2026 include permitting VDA losses to be offset against VDA gains, lowering the TDS rate, and allowing transaction costs (like gas fees) to be included in the cost basis for taxation. He also pointed out the disparity between India's regime and international practices, where countries like the UAE and Singapore impose no tax on individual crypto gains, and others like the US and UK allow loss offsets.
The report also highlighted concentration and liquidity concerns. Less than 5% of traders accounted for 87% of total TDS collections (₹511.83 crore ecosystem-wide), indicating the policy disproportionately affects high-frequency traders and locks up capital, widening bid-ask spreads.
The broader policy debate is whether India's framework should continue prioritizing transaction visibility or evolve to reflect net economic outcomes, facilitating compliance and limiting capital flight. The 2026 budget is seen as a potential inflection point for creating a more balanced regulatory environment for India's maturing digital asset market.
