India‘s cryptocurrency taxation framework is increasingly being questioned over its impact on domestic trading activity, with industry research indicating that high transaction costs have encouraged investors to move toward offshore exchanges and alternative trading products. The government continues to impose a 30% tax on taxable gains from virtual digital assets, alongside a 1% tax deducted at source (TDS) on covered cryptocurrency transfers. Introduced in 2022, the regime also prevents investors from offsetting losses from one cryptocurrency transfer against gains from another.The rules remained unchanged in the 2026 Union Budget despite repeated requests from domestic exchanges and industry organizations for tax relief. Research by Indian policy think tank Esya Centre found that trading volumes on domestic cryptocurrency exchanges declined sharply following the introduction of TDS, while significant activity migrated to overseas platforms. The trend has raised questions about whether India’s approach is achieving its objectives of increasing tax compliance and improving visibility into cryptocurrency transactions.
Transaction Taxes Reduce Domestic Trading Liquidity
India’s 1% TDS is calculated on the value of covered cryptocurrency transfers rather than the profit earned from individual trades. For example, selling ₹100,000 worth of cryptocurrency can trigger a ₹1,000 withholding deduction even if the investor makes little or no profit. Although the withheld amount can generally be credited against the investor’s final tax liability, repeated deductions reduce the capital available for subsequent transactions. This creates particular difficulties for market makers, arbitrage traders and other participants operating with narrow profit margins. Esya Centre’s research found that domestic exchange trading volumes declined by as much as 81% in the four months following TDS implementation.An earlier study estimated that Indian investors conducted more than ₹3.5 trillion in cryptocurrency transactions through offshore exchanges between July 2022 and July 2023. The organization subsequently reported that domestic trading volumes remained approximately 88% below their earlier levels as of March 2024. These figures demonstrate the historical scale of the shift, although they should not be interpreted as current October 2026 market-share measurements. Esya Centre has recommended reducing TDS to 0.01%, arguing that lower transaction costs could encourage activity to return to regulated Indian platforms.
Offshore Activity Complicates Tax Enforcement
The migration of cryptocurrency trading creates challenges for authorities attempting to monitor transactions and enforce reporting obligations. Documents reported by Reuters in July 2026 indicated that Indian tax officials were concerned about undeclared cryptocurrency holdings and transactions conducted through foreign exchanges and private wallets. The Reserve Bank of India has also raised concerns about cryptocurrency-related financial stability risks, particularly those associated with foreign-currency stablecoins. India has strengthened reporting requirements while retaining its existing tax structure. New cryptocurrency transaction-reporting obligations introduced through the Finance Act 2025 became effective in April 2026. Foreign virtual-asset service providers serving Indian customers also remain subject to applicable anti-money-laundering registration requirements.Using an offshore platform does not automatically exempt Indian residents from domestic taxation. However, overseas trading activity can be more difficult to supervise than transactions conducted through locally regulated exchanges. Another consequence has been the growing popularity of cryptocurrency derivatives. Industry executives cited by Moneycontrol in August 2026 estimated that futures and related products accounted for at least 80% of trading activity on domestic cryptocurrency platforms. That figure reflects industry estimates rather than independently audited market-wide data. For domestic exchanges, the challenge is maintaining liquidity and competitiveness while complying with India’s regulatory framework.For policymakers, the question is whether high transaction taxes improve compliance or encourage activity to move beyond the reach of domestic supervision. The available evidence indicates that taxation has contributed to offshore migration, although regulatory uncertainty, product availability and broader market conditions also influence trading behavior. India’s future policy decisions will determine whether domestic cryptocurrency platforms can recover activity lost to overseas competitors.