INTRODUCTION
The rapid growth of cryptocurrency and Virtual Digital Assets (VDAs) has presented one of the most complex regulatory challenges for India in recent years. From being virtually unregulated to attracting millions of investors and generating significant tax revenue, the crypto ecosystem has evolved dramatically. However, this growth has occurred in a fragmented regulatory environment that continues to create uncertainty for investors, businesses, and regulators alike.
In 2022, the Government of India introduced a comprehensive taxation regime for VDAs through the Finance Act. This included defining Virtual Digital Assets under Section 2(47A) of the Income Tax Act, imposing a flat 30% tax on income from transfer of VDAs under Section 115BBH, and mandating a 1% Tax Deducted at Source (TDS) under Section 194S. These measures marked a shift from outright hostility to a taxation-focused approach, signalling implicit acceptance of crypto activities while maintaining a cautious stance.[1]
Despite these taxation measures and subsequent Anti-Money Laundering (AML) guidelines issued by the Financial Intelligence Unit (FIU-IND), India still lacks a comprehensive legislation governing the issuance, trading, custody, and consumer protection aspects of cryptocurrencies. This has resulted in a paradoxical situation where VDAs are taxed as if they are legitimate assets, yet operate in a legal grey zone with minimal investor safeguards and evolving enforcement challenges.
The Supreme Court’s 2020 decision[2] striking down the RBI’s banking ban on crypto opened the door for the industry, but subsequent regulatory steps have been piecemeal. As of 2026, issues such as high tax-induced offshore migration, inadequate investor protection, enforcement gaps in PMLA compliance, and absence of clear classification of crypto assets (as commodity, security, or currency) continue to persist.
This blog analyses the evolution of the legal framework for cryptocurrency and Virtual Digital Assets in India, with particular focus on the gaps that have emerged after the implementation of the 2022 TDS regime. It examines the existing regulatory architecture, key challenges, judicial interventions, and suggests a pragmatic way forward for a more balanced and comprehensive regulatory regime.
Understanding Cryptocurrency and Virtual Digital Assets
Cryptocurrency refers to a digital or virtual form of currency that uses cryptography for security and operates on decentralised networks, typically based on blockchain technology. Bitcoin, introduced in 2009 by Satoshi Nakamoto, marked the beginning of this asset class. Over the years, thousands of cryptocurrencies and tokens have emerged, including Ethereum, Solana, and stablecoins.
In India, the Income Tax Act, 1961, under Section 2(47A) inserted by the Finance Act, 2022, defines Virtual Digital Assets (VDAs) broadly to include any code, number, or token generated through cryptographic means, providing a digital representation of value.[3] This definition covers cryptocurrencies, non-fungible tokens (NFTs), and other digital assets, but excludes foreign currency and certain notified assets.
The journey of crypto regulation in India has been eventful. In 2018, the Reserve Bank of India (RBI) issued a circular banning banks and regulated entities from dealing with crypto businesses. This was challenged and struck down by the Supreme Court in Internet and Mobile Association of India v Reserve Bank of India (2020), which held the ban to be disproportionate and violative of Article 19(1)(g) of the Constitution.[4] The judgment paved the way for the growth of crypto exchanges and investor participation in India.
The 2022 taxation regime marked a significant policy shift. Instead of banning or heavily regulating the asset class, the government chose to tax it heavily while bringing it under the anti-money laundering framework. This approach reflects a cautious acceptance treating VDAs as taxable assets without granting them full legal recognition as currency or securities.
Globally, jurisdictions have adopted varied approaches: El Salvador made Bitcoin legal tender, the European Union introduced MiCA (Markets in Crypto-Assets) regulation for comprehensive oversight, while countries like China imposed an outright ban. India’s framework lies somewhere in between taxation without comprehensive licensing or consumer protection laws.
As of 2026, while the number of crypto users in India remains significant despite high taxation, the absence of a dedicated statute continues to create uncertainty regarding the legal status, trading mechanisms, custody norms, and dispute resolution for VDAs.
LEGAL AND REGULATORY FRAMEWORK POST-2022
The Finance Act, 2022 introduced a dedicated taxation regime for Virtual Digital Assets, marking the first structured regulatory intervention by the Union Government. Section 2(47A) of the Income Tax Act, 1961 defines VDAs, while Section 115BBH imposes a flat 30% tax on income from the transfer of VDAs without allowing any deductions (except cost of acquisition) or set-off of losses. Additionally, Section 194S mandates 1% TDS on transfer of VDAs, applicable to both residents and non-residents in certain cases.[5]
On the anti-money laundering front, the Prevention of Money Laundering Act, 2002 (PMLA) was amended to bring crypto exchanges and Virtual Asset Service Providers (VASPs) under its ambit. The Financial Intelligence Unit-India (FIU-IND) issued guidelines requiring all crypto platforms operating in India to register as Reporting Entities. Non-compliant platforms, including major global exchanges like Binance, faced enforcement actions including blocking of apps and websites.[6]
Apart from taxation and AML measures, other laws apply indirectly:
- The Information Technology Act, 2000 (as amended) governs cybersecurity and intermediary liability;
- Securities and Exchange Board of India (SEBI) has been monitoring crypto assets that may qualify as securities; and
- Goods and Services Tax (GST) is applicable on crypto transactions at 18% on the transaction value.
However, India still does not have a comprehensive, dedicated legislation for cryptocurrency regulation as of mid-2026. Unlike the European Union’s MiCA or Singapore’s Payment Services Act, India’s approach remains fragmented relying heavily on taxation and enforcement rather than a licensing and supervisory framework. The absence of clear rules on classification of crypto assets (whether as currency, commodity, security, or property), investor protection, insolvency resolution for crypto firms, and custody standards continues to create significant regulatory uncertainty.[7]
This piecemeal framework, while successful in generating tax revenue and bringing some transparency through TDS and FIU registration, has left several critical gaps that affect market participants, innovation, and enforcement.
KEY GAPS AND CHALLENGES AFTER THE TDS REGIME
Despite the introduction of the 2022 taxation regime, several critical gaps remain in India’s approach to regulating Cryptocurrency and Virtual Digital Assets.
The most glaring deficiency is the absence of a comprehensive dedicated legislation. While VDAs are taxed, they lack clear legal recognition as an asset class. This creates uncertainty regarding their status whether they qualify as currency, commodity, security, or property for different legal purposes such as contract enforcement, insolvency, inheritance, and taxation on inheritance. The lack of a unified regulatory body further compounds the problem, leading to overlapping jurisdictions between the Ministry of Finance, RBI, SEBI, and FIU-IND.
Another major challenge is investor protection and market integrity. Unlike traditional securities, there is no robust framework for licensing of exchanges, custody norms, or grievance redressal mechanisms. Several instances of exchange collapses, rug pulls, and frauds have left investors with little recourse. The high 30% tax rate coupled with 1% TDS has also triggered significant offshore migration, with many Indian investors and traders shifting to foreign platforms, resulting in tax leakage and increased difficulty in enforcement.
Anti-Money Laundering (AML) compliance remains patchy. Although FIU-IND registration has been made mandatory, many smaller platforms and peer-to-peer transactions continue to operate outside the regulated framework. The absence of clear Travel Rule implementation (as recommended by FATF) and difficulties in tracing blockchain transactions pose serious risks of money laundering and terrorist financing.
Additionally, issues such as taxation of losses, treatment of staking rewards, airdrops, and DeFi transactions remain ambiguous. The prohibition on set-off of losses under Section 115BBH has been widely criticised as overly harsh, discouraging genuine investors. Judicial intervention has become necessary to fill these legislative gaps, but courts can only provide interim solutions.
These gaps have created a regulatory environment that is simultaneously heavy on taxation and light on protection and clarity, potentially stifling innovation while failing to fully address systemic risks.
JUDICIAL RESPONSE AND RECENT DEVELOPMENTS
The judiciary has played a crucial role in filling the legislative vacuum surrounding cryptocurrency regulation in India. The landmark Supreme Court judgment in Internet and Mobile Association of India v Reserve Bank of India (2020) remains the foundational ruling, where the Court struck down the RBI’s circular banning banking services to crypto businesses, affirming the right to carry on trade under Article 19(1)(g).[8]
In recent years, courts have increasingly dealt with issues arising from the 2022 taxation regime. The Madras High Court in Wipro Ltd. v. Deputy Commissioner of Income Tax and other cases has examined the classification of crypto assets. Some High Courts have recognised cryptocurrencies as “property” capable of being attached or forming part of estate in insolvency and matrimonial disputes.[9]
Enforcement actions against non-compliant exchanges have also reached the courts. Global platforms like Binance faced bans and subsequent legal challenges. The courts have generally upheld the government’s power to regulate and impose compliance requirements under PMLA and the IT Act, while cautioning against arbitrary actions that may stifle innovation.
As of 2026, several writ petitions are pending before various High Courts and the Supreme Court concerning the constitutional validity of the 30% flat tax, the denial of loss set-off, and the scope of FIU-IND registration. The judiciary has repeatedly emphasised the need for a clear and comprehensive legislative framework rather than relying solely on taxation and enforcement measures.
Through its interventions, the Indian judiciary has attempted to balance investor rights, regulatory concerns, and technological innovation. However, the recurring need for judicial intervention underscores the urgent necessity for dedicated legislation on Virtual Digital Assets.
CONCLUSION AND WAY FORWARD
The regulatory approach towards Cryptocurrency and Virtual Digital Assets in India since the 2022 TDS regime reflects a cautious but incomplete strategy. While the introduction of taxation and AML compliance has brought some order and revenue to the exchequer, the absence of a comprehensive legal framework continues to create uncertainty, deter genuine innovation, and expose investors to significant risks.
The current regime is heavy on taxation and enforcement but light on clarity, investor protection, and forward-looking governance. Issues such as asset classification, custody standards, insolvency resolution, taxation of losses, and consumer safeguards remain inadequately addressed. This fragmented approach has not only led to offshore migration and tax leakage but has also forced the judiciary to repeatedly step in to fill legislative gaps. A balanced way forward requires the enactment of a dedicated Digital Assets Regulation Act. Such legislation should:
- Provide clear classification of VDAs (as commodity, security, or a separate asset class);
- Establish a unified regulatory authority or clarify the roles of RBI, SEBI, and FIU-IND;
- Introduce a licensing regime for exchanges, custodians, and VASPs with robust KYC/AML standards;
- Create investor protection mechanisms including grievance redressal and compensation funds;
- Introduce a more equitable taxation regime that allows set-off of losses and rationalises rates; and
- Promote innovation through regulatory sandboxes while addressing systemic risks.
Until a comprehensive law is enacted, the government should issue detailed guidelines on emerging areas such as DeFi, staking, NFTs, and stablecoins. India has the opportunity to emerge as a global leader in crypto regulation by adopting a pragmatic, innovation-friendly yet risk-conscious framework.
The journey from the 2018 RBI ban to the 2022 taxation regime shows progress, but the real test lies in transitioning from a reactive taxation model to a proactive, comprehensive regulatory ecosystem that balances economic opportunity with systemic stability.
Author(s) Name: Vaishnavi Karape (Savitribai Phule Pune University)
References:
[1] Finance Act 2022; Income Tax Act 1961, ss 2(47A), 115BBH, 194S
[2] Internet and Mobile Association of India v Reserve Bank of India AIRONLINE 2020 SC 298
[3] Income Tax Act 1961, s 2(47A)
[4] Internet and Mobile Association of India v Reserve Bank of India AIRONLINE 2020 SC 298
[5] Finance Act 2022; Income Tax Act 1961, ss 2(47A), 115BBH, 194S
[6] Prevention of Money Laundering (Maintenance of Records) Amendment Rules 2023; ‘Order in original No. 10/DIR/FIU-IND/2024 in the matter of Binance u/s Section 13 dated 19.06.2024’ (Finance Intelligence Unit-India, 19 June 2024) <https://fiuindia.gov.in/pdfs/judgements/Binance_Order_10_2024.pdf> accessed 10 June 2026
[7] ‘Markets in Crypto-Assets Regulation (MiCA)’ (European Securities and Markets Authority, 28 November 2025) <https://www.esma.europa.eu/esmas-activities/digital-finance-and-innovation/markets-crypto-assets-regulation-mi> accessed 10 June 2026; Payment Services Act 2019 (Singapore)
[8] Internet and Mobile Association of India v Reserve Bank of India AIRONLINE 2020 SC 298
[9] Rhutikumari v Zanmai Labs Pvt Ltd (2025:MHC:2437)