Fewer than a quarter of the 645,000 individuals who made cryptocurrency transactions in India in the financial year ended March 2023 reported them on their tax returns, government documents reviewed by Reuters showed Wednesday.
The finding came alongside a separate assertion from the Reserve Bank of India that policies "leaning towards prohibition" may be warranted for the country's cryptocurrency sector. The central bank wants banks and financial institutions barred from crypto assets and privately issued stablecoins to limit contagion risks, documents from May and June showed.
That stance carries particular weight because it comes from the institution that attempted a de facto ban in 2018, only to have it struck down by India's Supreme Court. Since that ruling, digital assets have existed in a grey zone. A 2021 draft bill to ban private cryptocurrencies was never presented to Parliament, and a discussion paper on the matter has been deferred repeatedly. The government has said any plan should balance innovation with risk management and protect monetary sovereignty.
What the tax department found
Transactions routed through overseas exchanges and private wallets make it harder to identify beneficial owners and recover taxes, the tax department said. Rupee-denominated peer-to-peer trades make taxable crypto income more difficult to track. Global exchanges, including Binance and Coinbase, can operate in India after registering with a government agency.
India taxes cryptocurrency gains at 30% and applies a 1% levy on each transaction. Despite those rules, widespread reporting compliance has not followed. The tax department also warned that price volatility and the absence of uniform valuation standards complicated the assessment of crypto assets for tax purposes. The documents showed that the Ministry of Corporate Affairs is examining accounting standards and other guidance for virtual digital assets.
The RBI's concerns about stablecoins
The central bank extended its concerns to stablecoins. The RBI said privately issued stablecoins backed by foreign currencies pose a threat to domestic monetary sovereignty. Rupee-backed tokens present a related problem. The RBI warned they could reduce the government's income from issuing its fiat currency and create financial stability risks during periods of market stress.
Allowing stablecoins could also make cryptocurrency gains more difficult to detect and tax by reducing the need to convert holdings into fiat currencies, the central bank added.
A source familiar with the RBI's thinking told Reuters that the central bank's inclination is toward prohibition to keep cryptocurrencies outside of the regulated financial system. The source requested anonymity as they were not authorized to speak to the media. India's finance ministry and the RBI did not respond to Reuters' requests for comment.
India's market and the wider policy gap
Despite the regulatory uncertainty, India has nearly 39 million crypto traders who held about $2.1 billion in digital assets at the end of May, according to tax department.
India's dependence on energy imports and its persistent current account deficit has left it exposed to external shocks. When tensions with Iran drove oil prices higher in a recent period, energy costs rose and the rupee fell to record lows. Authorities have expressed concern that widespread crypto adoption could accelerate capital outflows through channels that bypass traditional banking.
Countries including Japan and Singapore have moved to regulate cryptocurrencies rather than restrict them. The United States has passed legislation to support broader stablecoin use. India's internal documents suggest key agencies remain closer to China's position, which prohibits digital tokens, than to regulatory frameworks adopted by other major economies.
In September, India's finance ministry, after consultations with the RBI, backed limited regulatory clarity for virtual assets. Officials argued then that existing tax laws had helped contain risks from the asset class. The documents from May and June show the prohibition argument has since reasserted itself within key agencies.
At present, Indian banks are not prohibited from dealing in cryptocurrencies. Major lenders have largely avoided the sector after repeated warnings from the RBI.
Alex Shepel
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