Budget 2025 Expectations: What The Crypto Industry Expects To See On TDS, Offsetting Gains

Budget 2025 Expectations: The 1% TDS on every crypto transaction has created significant friction for investors and traders.

As India leads the way for crypto adoption worldwide, effective measures could help revitalise the country's crypto ecosystem.

Source : Ewan Kennedy/Unsplash

Budget 2025: Two years ago, Finance Minister Nirmala Sitharaman introduced a taxation framework for Virtual Digital Assets (VDAs), including cryptocurrencies. At the time, this was seen as a forward-thinking move, signalling India's intent to regulate the rapidly evolving crypto ecosystem. The primary goal was to bring transparency and accountability by monitoring crypto transactions.

However, the high compliance burden and steep tax rates have led to unintended consequences. Many investors and traders have shifted to foreign exchanges to sidestep these regulations, making it increasingly challenging to track transactions. This exodus has not only impacted the domestic crypto ecosystem but also led to significant revenue loss for the Government.

According to a recent Esya Research report, India has already lost over Rs 6,000 crore (approximately $724 million) in potential tax revenue from VDAs since July 2022. This is a clear indication that the current approach needs recalibration.

To address these challenges and reinvigorate the domestic crypto market, the upcoming Union Budget must introduce more balanced policies.

The major pain points for crypto investors and traders in India currently are:

1% TDS On Every Transaction

The 1 per cent Tax Deducted at Source (TDS) on every crypto transaction has created significant friction for investors and traders. While it intends to provide the Government with a mechanism to track crypto transactions, its execution has had adverse effects on the ecosystem.

Retail traders, who contribute significantly to market liquidity, have been deterred by the tax, leading to a decline in trading volumes across Indian exchanges.

Many traders have shifted to international exchanges that do not impose similar taxes, further draining liquidity and reducing transaction traceability for the Indian Government.

Although the TDS aims to increase Government revenue, it has inadvertently contributed to a decline in domestic trading activity, resulting in lower overall tax collection.

Lack Of Offsetting Losses Against Gains

The inability to offset crypto trading losses against gains adds another layer of complexity and discouragement for investors.  Investors are required to pay taxes on gross gains even if they incur losses on other trades. This leads to an inequitable tax burden, as it fails to account for the volatile nature of cryptocurrencies.

Need For Policy Reform

India’s current approach to crypto taxation has created a compliance-heavy environment that stifles innovation and growth. To nurture the crypto ecosystem and reclaim its lost revenue potential, the Government should consider:

Reducing the TDS to a Minimal Level: A lower TDS rate, such as 0.1 per cent, would still allow transaction monitoring while reducing the liquidity burden on traders.

Allowing Loss Offsetting: Introducing provisions to offset losses against gains would align crypto taxation with other asset classes, encouraging broader participation.

As India leads the way for crypto adoption worldwide, these measures could help revitalise the country's crypto ecosystem, boost innovation, and ensure a steady flow of tax revenue without stifling market growth.

(The author is the Co-founder and CPO of Mudrex)

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