India, once hailed as the second-largest cryptocurrency market globally by Chainalysis in 2023, is now facing a self-inflicted crisis in its digital asset ecosystem. A controversial tax policy introduced in 2022 has backfired dramatically, pushing nearly all domestic trading activity offshore and leaving local exchanges struggling to survive.
The Indian government’s decision to impose a 1% Tax Deducted at Source (TDS) on every crypto transaction—on top of a 30% capital gains tax—has proven to be a major deterrent for traders and investors alike. Over a year after implementation, the consequences are clear: 95% of India’s crypto trading volume has migrated to overseas platforms, according to CoinDCX, one of the country’s leading domestic exchanges.
The Impact of India’s 1% TDS on Crypto Trading
Since the enforcement of the 1% TDS rule on July 1, 2022, Indian crypto exchanges have witnessed a steep decline in user activity and liquidity. Unlike traditional financial instruments such as stocks or bonds, crypto transactions now face immediate tax deductions at the point of trade, regardless of profit or loss.
Sumit Gupta, CEO of CoinDCX, criticized the policy, stating that the original intent was to track transactions—not generate revenue. However, the outcome has been counterproductive:
“The 1% TDS has driven 95% of Indian trading volume to international platforms, where regulators have little to no oversight.”
This mass exodus not only undermines the government’s goal of transparency but also weakens domestic innovation and economic opportunity within the blockchain space.
Moreover, the tax framework disallows offsetting losses against gains—a standard practice in most mature financial markets. This one-sided approach further discourages risk-taking and long-term investment, pushing traders toward decentralized exchanges (DEXs) and peer-to-peer (P2P) platforms beyond regulatory reach.
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Why Traders Are Fleeing Domestic Exchanges
Several key factors explain why Indian users are abandoning local platforms:
- Immediate 1% deduction per trade: Every buy or sell order incurs an automatic 1% deduction, reducing effective capital and eroding margins.
- No loss adjustment allowed: Traders cannot use losses to balance taxable gains, increasing overall tax liability.
- Lack of clarity and stability: Ongoing regulatory uncertainty leaves businesses hesitant to scale operations.
- Superior alternatives abroad: International exchanges offer lower fees, better liquidity, and more asset options without punitive taxation.
As a result, even during periods of broader market recovery in 2024 and early 2025, Indian exchanges remain stagnant. Domestic platforms like CoinDCX and WazirX have reported significant drops in daily trading volume—some citing declines of up to 80% post-TDS implementation.
Case Study: CoinDCX’s Struggle and Workforce Reduction
In August 2024, CoinDCX announced a 12% workforce reduction, cutting 71 employees amid sustained pressure from both market conditions and regulatory headwinds. A company spokesperson explained that the layoffs were necessary due to shifting business priorities driven by unfavorable tax policies.
“India imposes a 30% tax on crypto profits and a contentious 1% TDS on every transaction since February 1, 2022. The TDS directly impacts our revenue model and forces us into survival mode.”
This move reflects a broader trend across the Indian fintech sector, where innovation is being stifled not by lack of demand—but by policy design.
Broader Implications for Emerging Markets
India’s experience serves as a cautionary tale for other nations considering heavy-handed crypto taxation. While governments aim to regulate and collect revenue, overly aggressive policies risk driving economic activity underground or offshore.
Countries like Turkey, Nigeria, and Indonesia—also among the top adopters of cryptocurrency—have taken more balanced approaches, focusing on compliance frameworks rather than punitive taxes. These markets continue to see growth in on-ramp usage and exchange registrations.
In contrast, India’s approach may have achieved short-term administrative tracking goals but failed to foster a sustainable digital economy. With most trading now occurring outside regulated domestic channels, tax compliance may actually be lower than before.
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FAQ: Understanding India’s Crypto Tax Policy
Q: What is the 1% TDS on cryptocurrency in India?
A: It's a Tax Deducted at Source applied to every crypto transaction—buying, selling, or exchanging—regardless of profit. The exchange must deduct 1% and remit it to the government.
Q: Does the 30% capital gains tax apply to all crypto profits?
A: Yes. After deducting the cost of acquisition, 30% of net gains are taxed. No offsetting of losses is permitted.
Q: Why did trading volume drop so sharply after the TDS was introduced?
A: The immediate cost of trading increased significantly. Combined with inflexible rules and uncertainty, traders moved to offshore platforms offering better terms.
Q: Can Indians still trade crypto legally under this system?
A: Yes, but high taxes and limited utility make domestic exchanges less attractive. Many users turn to decentralized or foreign platforms instead.
Q: Is there any proposal to revise these taxes?
A: As of mid-2025, no official rollback has been announced. However, growing criticism from industry leaders suggests potential future adjustments.
Q: How does this compare to crypto taxation in other countries?
A: Most developed nations apply capital gains taxes only upon realization and allow loss carryforwards. India’s model is among the strictest globally.
Lessons for Regulators and the Global Crypto Community
India’s case underscores a fundamental truth: regulation should enable innovation, not suffocate it. While taxation is a legitimate government function, poorly designed policies can lead to unintended consequences—including reduced compliance and lost economic potential.
For policymakers, the takeaway is clear: engage with industry stakeholders before implementing sweeping measures. Transparent dialogue could have prevented the current exodus and preserved India’s position as a leader in blockchain adoption.
For traders and investors, the message is equally important: seek platforms that offer regulatory clarity, low friction, and global access.
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Final Thoughts
India had a golden opportunity to shape the future of digital finance in South Asia. Instead, its aggressive crypto tax regime has driven talent, capital, and innovation overseas. With 95% of trading volume now outside domestic oversight, the government faces a critical choice: double down on control or recalibrate toward competitiveness.
As blockchain technology continues to evolve globally, flexibility and forward-thinking regulation will define which nations lead—and which fall behind.
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