Is Crypto Trading Legal in India in 2023?

However, barring possibly the new tax laws (which we will discuss in a bit), India has yet to make any significant strides towards creating a policy framework to support the domestic crypto industry and safeguard investors from the blindspots of the decentralized asset class.

Bitcoin, the world’s biggest cryptocurrency by market cap, was created in 2009. The innovative ideas, technology, and principles underpinning Bitcoin and blockchain technology rapidly spurred the creation of numerous other digital currencies.

In those early days, as cryptocurrencies were just beginning to surface, the Indian government’s response was relatively subdued. At that time, the budding asset class barely registered on the government’s radar. Expectedly so, given that cryptocurrency’s allure was primarily limited to a niche group of tech-savvy enthusiasts.

Much like other governments worldwide, India found itself pondering how to regulate this innovative form of currency without stifling progress and while making sure to safeguard consumers.

From time to time, the RBI and the government released statements, acknowledging that they were assessing the legal and security implications associated with digital currencies. The Ministry of Finance also issued multiple advisories alerting investors about the potential risks associated with speculative investments in crypto.

India had its first crypto exchange in 2014. However, crypto trading remained limited to a niche group of traders until around 2017, when Bitcoin started hitting one high after another.

The alpha crypto’s price rose rapidly and surpassed $20,000 for the first time in its history. The speed at which the price rose was remarkable — it surpassed the $10,000 milestone on November 28, 2017, and then hit $20,000 on December 17, 2017. This remarkable feat signified a 100% price increase within a span of just 19 days.

It was at that point when more and more Indians, including young professionals, students, housewives, business owners, etc., began to take notice of cryptocurrency as a potentially lucrative investment opportunity.

The growing popularity of cryptocurrencies in India became unmistakable, prompting both the government and the RBI to respond. The state recognized the importance of a thorough regulatory framework to tackle the challenges presented by this digital financial evolution. This marked the beginning of a quasi-clampdown on crypto and crypto-centric businesses.

However, rather than taking a balanced approach that would serve all stakeholders, the central bank opted for a more confrontational approach against the crypto sector in India.

In April 2018, the RBI released a circular that would profoundly affect Indian crypto businesses and investors. The circular directed all financial institutions, including banks and payment gateways, to stop providing services to crypto-centric businesses.

As you would guess, the move effectively cut off the lifeline for the country’s homegrown crypto industry. The circular made it practically impossible for many affected businesses to operate, let alone grow.

The RBI justified the move by citing the potential risks associated with the asset class. The central bank expressed apprehensions regarding money laundering, financing of terror and illicit activities, and the general lack of consumer protection within the largely unregulated industry.

While the RBI’s concerns were not unfounded, the decision to effectively freeze the industry’s growth was met with widespread criticism and legal challenges.

The RBI’s circular sparked a series of events that would shape the future of cryptocurrency regulation in India. The industry, unwilling to accept this blow to their growth, rallied together and filed a petition with the Supreme Court of India, challenging the circular’s constitutionality.

The court battle unfolded over the course of nearly two years, culminating in a landmark judgment in March 2020. The Supreme Court ultimately ruled in favor of the cryptocurrency industry, declaring the RBI’s circular to be disproportionate and unconstitutional.

The verdict breathed new life into crypto trading in India, paving the way for a resurgence of exchanges and renewed interest from investors.

However, the victory was not without its challenges. The regulatory landscape remained uncertain, with the government still insisting on a stringent (if not outright hostile), approach to regulating cryptocurrencies.

From July 2020 to June 2021, India’s digital currency market grew by 641%, making it the second-fastest-growing market in the world, according to a report by Chainalysis.

However, the rapid growth of cryptocurrencies in India raised calls for regulation, even from the industry itself. Despite many international regulators recognizing legitimate uses for cryptocurrencies, India’s approach still remains complex and unclear, with fundamental questions about the legality of crypto in India unresolved.

In the wake of the Supreme Court’s ruling, the Indian government formed an inter-ministerial committee tasked with formulating a comprehensive regulatory framework for cryptocurrencies.

The committee’s full set of recommendations has yet to materialize into concrete legislation, leaving the industry in a state of flux as it awaits further clarity on its legal status. In November 2021, a draft legislation aimed at banning crypto trading was prepared, but was later withdrawn after it caused widespread panic that significantly affected crypto businesses and investors.

In February 2022, Indian Finance Minister Nirmala Sitharaman announced plans for a Central Bank Digital Currency (CBDC), along with a new tax regime for digital currencies. The government introduced two taxes on crypto, which we’ll explore in the following segment. To put it simply, these taxes were set at a rather high rate, deliberately aimed at deterring people from investing in crypto.

Nonetheless, some interpreted this as an indication that the government was finally prepared to acknowledge and legitimize the crypto industry. That sense of optimism, however, proved premature.

Sitharaman was quick to point out that the government’s choice to tax digital currencies shouldn’t be interpreted as them being deemed legal. “I don’t wait for regulation to be in place before taxing individuals who are generating profits,” the Finance Minister noted.

In Budget 2022, Sitharaman introduced two taxes on crypto. Although the elevated tax rates sparked significant reactions from the Indian crypto community, it marked the first instance of the government officially categorizing cryptocurrencies and NFTs as “Virtual Digital Assets.” The following is a rundown of the key takeaways from the new tax regime:

• A 30% tax to be applied to income derived from the transfer of virtual digital assets, such as crypto and NFTs, at the end of each fiscal year.
• A 1% TDS (Tax Deducted at Source) on top of the 30% tax on all incomes derived from virtual digital assets.
• No deductions, other than the cost of acquisition, permitted when declaring income from digital asset transfers.
• Losses from digital assets cannot be offset against any other sources of income.
• The receipt of gifted digital assets will be subject to taxation.
• Losses from one type of virtual digital currency cannot be offset against earnings from another digital currency.

The last point is particularly important because it seems somewhat counterintuitive. For example, let’s consider you made the following two crypto investments in the last fiscal year:

• Transaction #1: You purchased Bitcoin worth INR 4 lakh and sold it for INR 5 Lakh.
• Transaction #2: You bought Dogecoin worth INR 3 lakh but had to sell it for INR 2 lakh.

The net income from these transactions is zero, as the profit from the BTC trade was counterbalanced by the loss in the DOGE trade. Nonetheless, under the new tax regulations, your total taxable income from crypto still stands at INR 1 lakh (the earnings from your Bitcoin stash)…

This means even though you suffered a loss of INR 1 lakh with your DOGE investment, this loss cannot be used to offset the profit gained from Bitcoin. In this situation you would still owe the Income Tax Department (30% of INR 1 lakh =) INR 30,000, not counting any surcharges or CESS.

Crypto Trading in India: Legal but in Need of Significant Improvement

To sum up, while cryptocurrency trading is legal in India, the industry desperately needs a fair, reliable, and less adversarial legal and regulatory framework to thrive.

Implementing a clear and transparent set of rules can foster innovation and encourage the continued expansion of the crypto sector in India. Both investors and the industry stand to benefit significantly from these developments, and the sooner they are realized, the better the prospects will be for all parties involved.

Looking to try your hands on crypto trading? Check out our review of the best crypto brokers and exchanges for traders to explore in 2023.

Is cryptocurrency trading legal in India?

Yes, cryptocurrency trading is currently legal in India. That said, the regulations governing it are still in flux and may undergo changes down the line.

Are there taxes on cryptocurrency trading in India?

As per the new tax regime announced in Budget 2022, a 30% tax rate is applied to income generated from cryptocurrency trading. Additionally, a 1% Tax Deducted at Source (TDS) is imposed on all transactions.

Can I use Indian banks for cryptocurrency transactions?

Yes, Indian banks can be utilized for cryptocurrency transactions. In 2020, the Supreme Court overturned the RBI’s ban on financial institutions offering services to crypto-related businesses.

Are there any plans for a CBDC in India?

The Indian Finance Minister did announce plans for a CBDC in February 2022. However, more information and a specific timeline for its implementation remain to be disclosed.

Can I set off losses from one cryptocurrency against gains from another in India?

Unfortunately, no. According to Budget 2022 tax regulations, losses from one virtual digital currency cannot be set off against income derived from another digital currency.