India’s Cryptocurrency Legal Labyrinth: The Regulatory Tightrope and Its Many Problems

Abstract

India’s regulatory framework for digital assets remains deeply ambiguous, making it challenging for firms, investors, and legal professionals to determine their obligations. India’s stance on cryptocurrency regulation as of 2025 illustrates the difficulties encountered by contemporary legal systems in adapting to emerging financial technology. The framework is simultaneously permissive and punitive, generating unprecedented legal concerns for all stakeholders involved.

I. Introduction: The Legal Limbo

Cryptocurrencies occupy an unusual legal position in India. As of 2025, their use is not prohibited, yet they are not recognised as legal tender by the government. This foundational ambiguity is the first of several legal problems confronting India’s cryptocurrency industry. Because cryptocurrencies lack a defined legal standing, anyone may trade and hold them; however, this very absence of definition complicates legal interpretation and enforcement.

This regulatory uncertainty has a substantial impact on commercial activity, contract law, and dispute resolution. Courts must address cryptocurrency-related disputes without clear legislative guidance, resulting in inconsistent judgments and unpredictable legal consequences. The uncertainty affects everything from the planning of digital asset succession to commercial contracts involving cryptocurrency payments.

The Reserve Bank of India (RBI) has maintained a cautious posture throughout. In the past, the RBI issued circulars directing banks not to deal with entities engaged in cryptocurrency transactions. The Supreme Court subsequently struck down those circulars in Internet and Mobile Association of India v. Reserve Bank of India.[1] The RBI had stated that it was examining modifications in certain electronic records referred to as “Decentralised Digital Currency” or “Virtual Currency” (VCs), including Bitcoin, Litecoin, and Dogecoin. Continuing regulatory scrutiny, which persistently reshapes the legal landscape, contributes significantly to ongoing legal uncertainty.

II. The Tax Paradox: Taxing What Is Not Legal Tender

Perhaps the most glaring legal inconsistency in India’s cryptocurrency framework arises in the domain of taxation. Virtual digital assets (VDAs), including NFTs and cryptocurrencies, are currently subject to taxation in India under the Finance Act, 2022,[2] at a flat rate of 30% on capital gains. An additional 1% Tax Deducted at Source (TDS) applies on the sale consideration. The government, while refusing to recognise cryptocurrencies as legal tender, imposes a substantial tax burden on them as valuable assets, creating a fundamental legal contradiction.

This fixed rate of 30% is among the highest in the world and raises several legal concerns. First, it segregates gains from cryptocurrencies from profits on traditional capital assets, the tax treatment of which varies according to the holding period. Second, the effective tax rate of 31.2% on cryptocurrency transactions is roughly equivalent to the rate applicable to lottery winnings, thereby treating certain investment-oriented activities as tantamount to gambling.

The 1% TDS requirement compounds compliance difficulties further. Failure by the buyer to deduct TDS can attract penalties under Sections 271C and 276B of the Income Tax Act, 1961.[3] Since both buyers and sellers bear obligations in peer-to-peer transactions, such trades are both legally precarious and operationally cumbersome.

III. The No-Loss Offset Rule: A Structural Anomaly

Among the most widely criticised features of India’s cryptocurrency tax regime is the prohibition on loss offset. Losses incurred on cryptocurrency transactions cannot be set off against gains from other cryptocurrency transactions, against other income, or against any other capital gains. This treatment differs fundamentally from the rules applicable to losses on conventional assets, making the legal framework arguably inequitable.

This rule is difficult to justify on principled grounds. Treating cryptocurrency investments less favourably than other investment categories, without a compelling rationale, conflicts with the principle of tax neutrality. It also means that taxpayers may remain liable to pay tax even if the overall value of their cryptocurrency portfolio has declined, raising potential concerns under Article 14 of the Constitution of India,[4] which guarantees equality before the law.

Loss harvesting, a common tax-planning strategy available to investors in other asset classes, is unavailable to cryptocurrency investors. This forces market participants to time profit realisations carefully, adding another layer of complexity to an already demanding compliance environment.

IV. Regulatory Fragmentation: Multiple Agencies, Conflicting Mandates

A foundational problem with India’s cryptocurrency regulatory architecture is the overlap and occasional contradiction among the mandates of multiple regulatory bodies. The Securities and Exchange Board of India (SEBI) has suggested that multiple regulators share oversight of cryptocurrency trading,[5] underscoring the difficulty of determining which regulator holds primary authority over different aspects of cryptocurrency operations.

The RBI has historically advocated for strict regulation or outright prohibition on grounds of financial stability. SEBI approaches cryptocurrencies through a securities regulation lens, emphasising investor protection and market integrity. The Ministry of Electronics and Information Technology is interested in the potential applications of blockchain technology, while the Ministry of Finance treats cryptocurrencies primarily as taxable assets. These divergent institutional perspectives produce contradictory signals for market participants.

The absence of a unified regulatory framework gives rise to numerous legal difficulties. Businesses must simultaneously navigate multiple, sometimes conflicting, sets of rules, and no single regulatory authority is positioned to provide clear compliance guidance. This exposes users and organisations to inadvertent legal violations.

V. The Banking Paradox: Practical Barriers to Lawful Activity

Although cryptocurrency activity is lawful in India, the operational conduct of banks creates significant practical impediments for users. Given the RBI’s sustained vigilance, banks frequently restrict services or freeze accounts belonging to clients who engage in cryptocurrency trading, even where such trading is not unlawful.

This creates a legal paradox: banking practices obstruct activities that the law does not prohibit. In the absence of explicit standards protecting financial services related to cryptocurrencies, consumers may find their accounts closed or services denied without adequate justification, and with limited legal recourse.

Banking restrictions also complicate the legal status of cryptocurrency exchanges in India. Exchanges are not technically prohibited, but the difficulty of securing reliable banking services undermines their operational viability and raises legitimate questions about their de facto legality.

VI. Compliance Challenges: KYC and AML in the Cryptocurrency Sector

Applying conventional Know Your Customer (KYC) and Anti-Money Laundering (AML) frameworks to cryptocurrency businesses constitutes a significant regulatory challenge. Under the Prevention of Money Laundering Act, 2002 (PMLA),[6] cryptocurrency exchanges and virtual asset service providers are required to implement customer identification procedures, maintain records, and report suspicious transactions to the Financial Intelligence Unit.

However, the pseudonymous nature of many cryptocurrencies is structurally incompatible with conventional KYC requirements, producing compliance obligations that existing legislative mechanisms are ill-equipped to address. The growing prevalence of decentralised finance (DeFi) protocols exacerbates the problem: DeFi platforms typically lack a central authority, leaving the identity of the responsible compliance officer and the mechanism for legal accountability both unclear.

Conventional AML and KYC frameworks presuppose the existence of centralised intermediaries capable of ensuring compliance. In the absence of such intermediaries, enforcing these obligations requires either a fundamental rethinking of regulatory design or the enactment of new legislation tailored to decentralised systems.

VII. Enforcement Challenges: Applying Legacy Laws to Digital Assets

India’s cryptocurrency regulatory challenges are compounded by enforcement difficulties that conventional legal mechanisms are poorly suited to address. Cryptocurrency transactions are recorded on immutable blockchains, which are simultaneously transparent and pseudonymous. This creates a permanent transactional record; however, many law enforcement agencies lack the technical capability to link on-chain transactions to identifiable individuals.

Cross-border cryptocurrency transactions present additional enforcement complexity. A single transaction may be recorded on a blockchain with no national jurisdiction, using infrastructure distributed across multiple countries, and involving participants from several different nations. This makes the detection and prosecution of cryptocurrency-related offences exceptionally difficult.

The law frequently cannot keep pace with the technical sophistication of cryptocurrency networks. Without appropriate statutory frameworks or sufficient technical expertise, judges and investigators must contend with concepts such as private keys, smart contracts, and decentralised protocols, making consistent and effective enforcement difficult to achieve.

VIII. The Absence of Consumer Safeguards

Notwithstanding the heavy tax burden imposed on cryptocurrency transactions, consumer protection measures remain conspicuously underdeveloped. India currently lacks a comprehensive regulatory framework protecting cryptocurrency investors. This stands in sharp contrast to the extensive protections afforded to participants in traditional financial markets.

This gap has direct legal consequences. Individuals who suffer losses as a result of fraud, market manipulation, or exchange failure have fewer actionable legal remedies than investors in regulated financial instruments. The absence of regulatory oversight, investor compensation schemes, or deposit insurance leaves consumers exposed to significant financial risk.

The lack of mandatory disclosure requirements for cryptocurrency projects means that issuers are under no obligation to provide retail investors with comprehensive information. This raises serious questions about whether the existing legal framework adequately protects those who invest in digital assets.

IX. International Dimensions: Cross-Border Regulatory Conflicts

India’s restrictive cryptocurrency regulations create legal complications for individuals and businesses engaged in international activity. Indians who work with or invest in cryptocurrencies outside India and subsequently return, or who report foreign assets, face a complex web of compliance obligations.

The Foreign Exchange Management Act, 1999 (FEMA),[7] does not clearly address the legal treatment of cryptocurrencies held abroad by Indian residents, creating potential liability for unwitting violations. Ongoing legal risks arise from the absence of clear rules on how to report and value foreign cryptocurrency holdings for FEMA compliance purposes.

These domestic difficulties are compounded by the rapid pace of regulatory change internationally. Individuals and businesses operating across multiple jurisdictions face heightened legal exposure because conduct that is lawful in one country may be prohibited in another.

X. Constitutional Concerns: Fundamental Rights and Legislative Competence

India’s cryptocurrency regulations raise a number of unresolved constitutional questions. The absence of a comprehensive parliamentary statute means that the regulatory framework rests primarily on executive actions and administrative circulars, the constitutional validity of which is open to challenge.

The punitive tax structure and banking restrictions may constitute an indirect prohibition on lawful economic activity, potentially infringing the fundamental right to carry on any trade or business guaranteed under Article 19(1)(g) of the Constitution.[8] The differential treatment of cryptocurrency assets as compared with conventional investments may also raise concerns under Article 14 regarding the requirement that similar cases be treated similarly.

The exercise of regulatory authority by multiple bodies without a clear statutory basis raises further constitutional questions about legislative competence and the rule of law. These unresolved constitutional issues generate persistent legal uncertainty for all participants in the cryptocurrency market.

XI. The Path Forward: The Case for Regulatory Clarity

The 30% tax on cryptocurrency gains and the 1% TDS have the effect of discouraging retail investor participation and constraining market growth. A reconsideration of these rates, to bring them into greater alignment with internationally competitive standards, would improve voluntary compliance and encourage investment. This conclusion underscores the need for a more coherent cryptocurrency regulatory framework: one that addresses genuine regulatory concerns while removing unnecessary impediments to investment and innovation.

India’s existing cryptocurrency regulations are characterised by significant incoherence, highlighting the urgent need for clear definitional frameworks, clearly delineated regulatory mandates, and workable compliance requirements. Without greater clarity, the cryptocurrency industry will remain in a state of legal uncertainty that is detrimental both to regulatory objectives and to the development of technological innovation.

India’s ongoing engagement with cryptocurrency regulation offers broader lessons about the importance of developing clear, adaptive legal frameworks that balance consumer protection with the encouragement of innovation, in conformity with both domestic constitutional requirements and international best practices. The current regulatory tangle illustrates the inadequacy of applying legacy legal frameworks to emergent technologies and the importance of forward-looking, technology-neutral legislative design.

References

[1] Internet and Mobile Association of India v. Reserve Bank of India, (2020) 10 SCC 274 (India).
[2] Finance Act, 2022, No. 6 of 2022, India Code (2022) (inserting ss. 115BBH and 194S into the Income Tax Act, 1961, governing taxation of virtual digital assets).
[3] Income Tax Act, 1961, No. 43 of 1961, India Code (2025), ss. 271C, 276B.
[4] India Const. art. 14 (guaranteeing equality before law and equal protection of the laws).
[5] Securities and Exchange Board of India, Discussion Paper on Regulation of Crypto Assets (2023).
[6] Prevention of Money Laundering Act, 2002, No. 15 of 2003, India Code (2025).
[7] Foreign Exchange Management Act, 1999, No. 42 of 1999, India Code (2025).
[8] India Const. art. 19(1)(g) (guaranteeing the right to practise any profession, or to carry on any occupation, trade, or business).

References

Statutes

Income Tax Act, 1961, No. 43 of 1961, India Code (2025).
Prevention of Money Laundering Act, 2002, No. 15 of 2003, India Code (2025).
Foreign Exchange Management Act, 1999, No. 42 of 1999, India Code (2025).
Finance Act, 2022, No. 6 of 2022, India Code (2022).

Constitutional Provisions
India Const. art. 14 (guaranteeing equality before law).
India Const. art. 19(1)(g) (guaranteeing right to practise any profession or carry on any trade or business).

Cases
Internet and Mobile Association of India v. Reserve Bank of India, (2020) 10 SCC 274 (India).

Regulations and Circulars
Reserve Bank of India, Circular No. RBI/2017-18/154, Banking Regulation Dept. (Apr. 6, 2018).
Central Board of Direct Taxes, Circular No. 4/2022 (Mar. 25, 2022) (clarifying taxation of virtual digital assets).

Books

Payal Malik, Blockchain and Cryptocurrency Regulation in India (2023).
Nishith Desai Associates, Crypto Assets Regulation in India (2024).

Journal Articles
Shreya Rao, Taxing the Intangible: India’s Approach to Cryptocurrency Taxation, 15 J. Tax’n Invs. 45 (2024).
Vivek Kathpalia & Sanya Gupta, Regulatory Fragmentation in India’s Cryptocurrency Framework, 28 Indian J.L. & Tech. 112 (2024).
Arjun Krishnan, Constitutional Challenges to Cryptocurrency Regulation in India, 62 J. Indian L. Inst. 234 (2025).
Priya Menon, The Banking Paradox: Cryptocurrency and Financial Inclusion in India, 19 Asia-Pac. J. Fin. Servs. L. 78 (2024).

Newspapers and Online Sources
Mayur Shetty, India Imposes 30% Tax on Crypto Gains, Times of India (Feb. 2, 2022), https://timesofindia.indiatimes.com/business/india-business/india-imposes-30-tax-on-crypto-gains.
Shelley Singh, RBI Calls for Crypto Ban Citing Financial Stability Risks, Economic Times (Feb. 14, 2024), https://economictimes.indiatimes.com/tech/technology/rbi-calls-for-crypto-ban.

Government Reports
Ministry of Finance, Report of the Committee on Virtual Currencies (2019).
Securities and Exchange Board of India, Discussion Paper on Regulation of Crypto Assets (2023).

Institutional Materials
Reserve Bank of India, Financial Stability Report (Dec. 2024).
International Monetary Fund, Regulating the Crypto Ecosystem: The Case of India, IMF Working Paper No. 24/158 (2024).