India’s Tax Officials Warn Crypto Threatens Tax Collection System

During a nearly three-hour parliamentary meeting on Tuesday, January 7, 2026, officials told lawmakers that crypto’s unique features make it nearly impossible to track income and collect taxes properly.

The Income Tax Department presented these warnings to the Parliamentary Standing Committee on Finance, joining forces with the Financial Intelligence Unit and Department of Revenue. Together, they discussed a report titled “A Study on Virtual Digital Assets (VDAs) and Way Forward.”

The Core Problem: Anonymous Money Movements

Tax officials explained that cryptocurrency allows people to transfer money anonymously across borders in seconds. These transactions often happen without banks or other regulated companies involved, making it extremely difficult for authorities to trace who owns what and who owes taxes.

The biggest headaches come from offshore exchanges, private crypto wallets, and decentralized finance platforms. Officials said that in many cases, they can’t even figure out who actually owns the crypto assets. When people use foreign exchanges that aren’t registered with India’s Financial Intelligence Unit, tax officials have limited power to request information or issue legal notices.

Source: @blockchainedind

Private wallets create additional problems. Since no company sits in the middle of these transactions, linking wallet addresses to real people becomes nearly impossible, especially when funds move across different blockchains.

India’s Harsh Tax System Drives Money Offshore

India currently operates one of the world’s toughest crypto tax systems. Traders face a flat 30% tax on all profits, plus a 1% tax taken out of every transaction above ₹10,000 (about $115). Add in a 4% surcharge and the new 18% goods and services tax on trading fees, and wealthy traders face a total burden reaching 42.7%.

The rules get even harsher. Traders can’t subtract losses from one cryptocurrency against gains from another. They can’t claim any expenses except their original purchase cost. And losses can’t be carried forward to future years or offset against other income like salary.

This strict system has backfired. Between July 2022 and July 2023, Indians traded over $42 billion worth of crypto on foreign exchanges—more than 90% of their total trading. Indian platforms lost up to 74% of their users, downloads, and web traffic. The government estimates it lost about $4.2 billion in tax revenue as trading moved overseas.

Massive Enforcement Campaign Underway

Despite these challenges, tax authorities aren’t giving up. The Central Board of Direct Taxes sent over 44,000 notices to traders who failed to report their crypto transactions. This campaign, called NUDGE (Non-Intrusive Usage of Data to Guide and Enable), cross-checks data from exchanges against what people reported on their tax returns.

The enforcement actions have uncovered significant hidden income. Tax raids found ₹888.82 crore ($99.9 million) in unreported crypto earnings during the 2024-25 fiscal year. Officials discovered another ₹1,089 crore in undisclosed foreign crypto income and ₹630 crore ($72 million) in hidden domestic holdings.

The Enforcement Directorate has seized or frozen ₹4,189.89 crore ($500 million) in crypto-related assets. They’ve arrested 29 people and filed 22 criminal complaints. Tax revenue from the 1% transaction tax jumped 41% to ₹511 crore ($61 million) last year.

The Binance Investigation

In October 2025, authorities launched a major investigation into over 400 wealthy traders suspected of hiding profits made on Binance between 2022 and 2025. The breakthrough came when Binance registered with India’s Financial Intelligence Unit in August 2024 after paying a $2.25 million penalty.

Once registered, Binance had to share user data with Indian authorities. This data sharing exposed traders who thought their offshore activity was invisible. Tax expert Ashish Karundia warned that penalties could reach up to 300% of the tax owed under the Black Money Act, with possible criminal prosecution.

Advanced Technology Meets Old Problems

India built sophisticated systems to catch tax evaders. They use Project Insight analytics, artificial intelligence, and international data sharing through the Crypto-Asset Reporting Framework. The system automatically sends notices when it finds differences over ₹1 lakh ($1,200) between exchange data and tax returns.

Yet despite this technology, officials admit the fundamental challenge remains. A source told Decrypt that “the Finance Ministry wants to curb decentralisation, privacy-focused systems, and offshore exchanges” but these features are built into crypto’s basic design.

Market Size Despite Restrictions

India hosts an estimated 100-150 million crypto users, making it the world’s largest crypto population. The country topped the Global Crypto Adoption Index for two years running. The crypto market in India grew from ₹22,130 crore in 2022-23 to ₹51,180 crore in 2024-25, and analysts project it could reach $13.9 billion by 2033.

Currently, 49 cryptocurrency exchanges have registered with the Financial Intelligence Unit. But the government maintains crypto isn’t legal tender and provides no formal legal recognition for digital assets.

Industry leaders argue the approach creates problems. Raj Kapoor, founder of the India Blockchain Alliance, said the tax department’s opposition “does not amount to a coherent market framework; instead, it risks creating a climate of fear without delivering clarity, investor protection, or systemic oversight.”

Budget 2026 May Bring Changes

The government will present Union Budget 2026-27 on February 1, 2026. The Central Board of Direct Taxes has been consulting with crypto companies about potential tax reforms. Industry representatives hope for a reduced transaction tax, possibly as low as 0.01%, and the ability to offset losses within crypto trading.

However, the recent parliamentary warnings suggest authorities remain focused on enforcement over encouragement. Officials indicated they plan to continue pressure on exchanges, tighter reporting requirements, and increased scrutiny of offshore activity.

The Unsolvable Equation

India faces a fundamental contradiction. Tax authorities want revenue from crypto trading but struggle to enforce collection on assets designed to operate outside traditional financial systems. The harsh tax regime drives activity offshore, which makes enforcement even harder, creating a cycle that satisfies no one.

While the government has built impressive tracking systems, officials acknowledge that offshore exchanges, private wallets, and DeFi platforms create gaps that are “virtually impossible” to close. The question now is whether Budget 2026 will attempt to fix this broken approach or double down on enforcement that’s already failing to achieve its goals.