In brief

• India's income tax department raised red flags associated with virtual digital assets in a presentation to Parliament's finance committee on Wednesday.
• Tax authorities cited anonymous transfers, offshore exchanges, and jurisdictional limitations that make detecting taxable income and recovering dues nearly impossible.
• The concerns come as Indian Finance Minister Nirmala Sitharaman prepares to present her ninth consecutive budget on February 1.

India's income tax authorities have joined the Reserve Bank of India in raising concerns over virtual digital assets, citing enforcement challenges that threaten the government's ability to track and tax crypto transactions as the Union Budget approaches.

On Wednesday, Tax authorities presented their concerns about cryptocurrency and other virtual digital assets to the parliamentary standing committee of finance, according to a Times of India report.

Officials outlined challenges in tracking crypto transactions, pointing to the technology's core features, borderless transfers, pseudonymous addresses, and transactions outside regulated banking channels, which create enforcement gaps, according to the report.

"The Finance Ministry wants to curb decentralisation, privacy-focused systems, and offshore exchanges; the FIU and Income Tax Department are on the same page," a source familiar with the matter told Decrypt.

"FIU-registered exchanges will also be scrutinised due to crypto-laundering reports now taken up by the Ministry of Home Affairs for detailed investigation, and the Tax Department has flagged irregularities by centralised exchanges, including misuse of customer funds, extreme leverage, and insider trading."

The concerns point to India’s institutional unease with privately issued crypto as Finance Minister Nirmala Sitharaman prepares to present her ninth consecutive budget on February 1, even as crypto traders remain subject to a 30% flat tax and 1% TDS amid the absence of a clear regulatory framework.

India is instead prioritising an “RBI-guaranteed” digital currency, with Union Minister of Commerce and Industry Piyush Goyal saying in October that heavy taxation is intended to prevent users from being “stuck” with unbacked crypto assets.

The Cabinet Committee on Parliamentary Affairs has proposed February 1 for presenting the Union Budget 2026-27, even though it falls on a Sunday, with the Budget Session starting January 28.

Tax officials also pointed out the jurisdictional overlap in cross-border crypto activity, with multiple countries involved but limited enforcement reach, particularly when platforms operate overseas or remain unregistered with India’s Financial Intelligence Unit (FIU).

Last July, the authorities announced they would use AI and global data-sharing under the Crypto-Asset Reporting Framework to cross-match TDS data from exchanges with income tax returns, issuing notices when discrepancies exceed $1,200 (₹1 lakh).

"The IT Department's opposition to wider crypto entry, as reported, should be read less as an isolated tax concern and more as a signal of India's broader institutional discomfort with privately issued digital assets,” Raj Kapoor, founder and CEO of the India Blockchain Alliance, told Decrypt.

He noted the approach "does not amount to a coherent market framework; instead, it risks creating a climate of fear without delivering clarity, investor protection, or systemic oversight."

India and crypto tax

Under the 2025 Union Budget, undisclosed crypto gains were brought under Section 158B, enabling retrospective audits up to 48 months and penalties of up to 70%, while the 30% flat tax and 1% TDS on every transaction remain unchanged, continuing to weigh on trading activity.

"The deeper policy risk is that sustained opposition without a parallel regulatory pathway will push innovation, capital, and talent offshore, leaving India as a consumer and tax collector of crypto activity rather than a rule-setter," Kapoor added.

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