Legal ≠ Legit: How India’s Crypto Tax Regime Whitewashes Scams

Introduction: Fintech Origins & Crypto Leap

Born from Frank McNamara’s embarrassment over the left-back wallet, the Diners Club card unwittingly paved the way for a payment revolution that has now exploded into today’s legally intricate financial ecosystem. The Cardboard-turned-pioneer model of ‘buy now, pay later’ set the stage for the global expansion of fintech and its legal regulatory battles.

While fintech remains challenging the legacy systems, disrupting the notion of cash-based transactions in the modern world and streamlining financial access through digital banking and mobile apps, crypto took a wider leap, decentralizing the entire financial structure.

Cryptocurrency, as a subsector of the financial technology (fintech), through blockchain technology, reimagined the concept of transparency in transactions, stripping the world of the need for traditional intermediaries.

This shift relates to the widening gap between legitimacy and compliance, shedding light on a deeper philosophical and legal conflict. Adapting to regulations, regulations regarding privacy of data, fiscal oversight, and prevailing within an enforceable setup or governing structure were some of the measures used by the fintech innovations to gain legitimacy. Crypto initiatives, on the other hand, prioritize technological integrity and user adoption, typically operating outside of legal frameworks or in regulatory grey areas. Now, do the compliance limits define the future of crypto within fintech’s ever-expanding domain? Moreover, whether the financial system, without being compliant, can be legitimate, is the fundamental question raised through the ongoing friction sparked with the lawmakers.

India’s Crypto Tax Regime: A Policy without Protection

The Finance Act, 2022, introduced a framework to specifically tax VDAs, including cryptocurrencies, treating them as virtual digital assets (VDAs). The Income Tax Act, 1961, under its section 2 (42a), defined any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means, providing a digital representation of value exchanged with or without consideration as a part of VDA.

A flat tax rate of 30%, along with any applicable surcharge and cess, is levied on income earned from the transfer of VDAs. Additionally, Section 194S of the Income Tax Act, 1961 advocates for the rate of Tax Deducted at Source (TDS), encapsulating that on transactions involving the VDAs above a specified threshold, a 1% deduction of consideration is required for taxes.

Through this, India moves its way among the top three countries, apart from South Korea and Japan that aggressively tax crypto without regulatory clarity.

The Tax-Legitimacy Fallacy

The strange illusion took root in India’s fast-expanding crypto market that ‘the tax compliance is equivalent to regulatory approval’, and for the unsuspecting retail investors, they are forced to believe that these ventures are supervised by the state, sanctioned, and vetted. However, to debunk the expectations, taxation by its very nature is blind to legitimacy; they are in no way monitoring the ethics and regulations surrounding the transactions. Without formal regulatory safeguards, the confusion has become fertile ground for scams in India. There is a mere assumption of protection when none exists.

While IT Act, as amended, establishes a statutory framework for fiscal implementations, the conspicuously lack a regulatory infrastructure necessary for their execution. Unlike

“Unlike conventional financial instruments regulated under the auspices of the Securities and Exchange Board of India (SEBI) or the Reserve Bank of India (RBI), Virtual Digital Assets (VDAs) in India are subjected to taxation in the absence of any formal legal classification, licensing regime, or supervisory oversight. This regulatory lacuna creates a paradox wherein financial activity is fiscally recognized yet remains institutionally unregulated, thereby resulting in a vacuum of accountability and consumer protection.”

India’s Income Tax Act, as amended, provides for taxation and TDS on VDAs, but lacks:

• A statutory definition of crypto-asset classifications beyond a broad and technologically vague description;
• Licensing or authorization requirements for exchanges or wallet providers, which remain unregulated under existing securities or payment laws;
• A legal mechanism for investor protection or dispute resolution, thereby exposing retail users to unchecked fraud and market manipulation.

This sequencing violates a foundational principle of public law: that state-sanctioned financial systems must be governed by rule-based regulation, not merely fiscal policy. Unless and until Parliament enacts a crypto-asset regulation framework—potentially under the aegis of the RBI or SEBI—taxation alone risks creating a legally incoherent system where formal state action (taxation) exists without substantive legal governance.

By substituting taxation for regulation, India fosters a financial ecosystem that appears legally sanctioned but is effectively unregulated. This tax-first approach misleads the public into assuming that crypto markets enjoy legal approval, even though the state exercises no oversight, enforcement, or consumer safeguards.

Constructing Legitimacy in a Regulatory Vacuum

The legitimacy in crypto is rather constructed than earned in India’s regulatory framework. It is a illusion constructed brick by brick by the ecosystem of perceived legitimacy constituted by the platforms, influencers and a complicit silence from the mainstream media and the government.

The VDA taxation implicitly recognizes them as legal without systemic clarity. That’s how a shell which lacks both meaningful oversight and protection, surfaces as a compliant and credible financial landscape.

The Indian judiciary has consistently maintained that the crypto and its regulation fell under the purview of the legislature, which limits the scope for intervention. In its recent decision the Supreme Court bench comprising Justices B.R. Gavai and Augustine George Masih, declined to entertain a petition advocating for creation of regulatory framework for digital assets, emphasizing the matter rather related to policy making and the legislative action are beyond the scope of the apex court. While this is consistent with judiciary’s role, but the absence of intervention has an unintended consequence, it might mislead the investors as it somehow is self regulating or operates under the approval of legal system.

Charting India’s Crypto Policy Future

Regulatory enforcement is a cornerstone of financial stability. Failures in regulatory oversight have historically contributed to major financial crises, including the 2007–08 Great Financial Crisis and the 2023 banking turmoil. In response, regulators worldwide have shifted from compliance-based to risk-based bank supervision, supported by the development and implementation of supervisory technologies (suptech). These technologies aim to identify and address financial distortions before they can materialize and threaten financial stability.

Comparative Perspective: Global Benchmarks

Although there is precedent for India’s tax-first, regulate-later approach, its flaws become evident when compared to international standards. Different but more logical approaches have been taken by jurisdictions worldwide, where taxes are used in conjunction with regulations rather than in place of them.

1. European Union (EU): MiCA as a Comprehensive Blueprint

Adopted in 2023, the EU’s Markets in Crypto-Assets (MiCA) regulation provides a structured model that combines innovation, market integrity, and investor protection. MiCA requires uniform disclosure requirements, service provider licencing, and European Securities and Markets Authority (ESMA) supervisory oversight. Therefore, there is little reason to believe that fiscal recognition equates to legal sanction because taxes are supported by a clear regulatory apparatus.

2. United States: Enforcement-Led Approach

The United States’ strategy has focused more on regulatory contestation than clarity. The Internal Revenue Service (IRS) enforces taxes on cryptocurrency gains, while the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) vie for jurisdiction. The main conflict is not whether cryptocurrency has legitimacy but rather which regulator controls it, even in the face of lawsuits against large exchanges. The cases show that there is a evident need for extensive analysis and a legal reform as tax law compliance alone is insufficient if securities law is not followed.

3. Singapore and the UAE: Sandbox and Licensing Regimes

Conversely, hubs such as UAE and Singapore have established ecosystems that clearly connect licensing and legitimacy. Exchanges are required to register, adhere to anti-money laundering regulations, and submit to regular audits. To prevent new entrants from evading oversight, both jurisdictions frequently employ regulatory sandboxes for evaluating innovation in controlled environments. In these situations, taxes strengthen legitimacy rather than unjustly replace it.

4. India in Contrast

India, in contrast, has established a temporary dwelling: fiscal acknowledgement by means of taxation without the supervision’s safeguards. Without the safeguards of investor protection, this produces the perilous appearance of legal endorsement. India views cryptocurrency more as a source of income than as a sector in need of regulation, in contrast to the EU, the US, or the UAE.

Conclusion

The dichotomy that a thing can be fiscally legalised while still being institutionally illegitimate is embodied in India’s crypto policy. Unregulated taxation creates uncertainty, exposing investors to fraud while entrepreneurs look for more hospitable jurisdictions overseas. India runs the risk of not being seen as a safe market or a hub for innovation as the EU aligns taxes with MiCA, the US struggles with legislative clarity, and Singapore and the UAE develop regulated ecosystems.

Fiscal policy alone cannot create legitimacy in financial systems; rules-based supervision, transparency among institutions, and consumer protection are necessary. A state that imposes taxes without exercising oversight forfeits its most basic responsibility, which is to maintain confidence in markets it acknowledges. The solution is to create a clear, enforceable regulation system pursuant to SEBI or the RBI rather than penalise gains with exorbitant levies. implementing it, India will continue to exist in a state of uncertainty where cryptocurrency is taxed but hazardous, a system that is legitimate in name but illegal in practice.