India Expands Encryption Asset Regulation: New Tax Rules and Reporting Requirements to be Implemented in 2025

The Indian government is gradually improving its encryption currency regulatory framework. The 2025 budget proposal introduces stricter reporting requirements and regulatory mechanisms based on the 30% tax rate from 2022. The 2022 Income Tax Act first incorporated virtual digital assets (VDAs) into the tax system but does not allow losses to offset other income. The 2025 budget proposal further expands the regulatory scope, requiring specific institutions to report encryption transactions on time. Meanwhile, the government has broadened the definition of VDAs to include all encryption assets based on distributed ledger technology. These changes come as Bitcoin rises due to favorable news, but the market still faces regulatory uncertainty and volatility risks.

In recent years, the regulatory attitude of countries around the world towards encryption has shifted from excessive regulation to a more flexible and prudent approach, primarily driven by the rapid popularity of crypto assets. However, India, as one of the most active countries in global crypto trading, still maintains strict regulations and harsh tax policies, lagging behind the trend of international market friendliness.

India's encryption tax system is considered one of the harshest in the world, severely undermining investor confidence and hindering innovation and application of blockchain technology. Despite market calls for policy easing, the Indian government's stance remains unchanged. The 2025 budget proposal and amendments to the Income Tax Act make certain adjustments to the current tax system, which are worth exploring in depth for their impact.

The Evolution of India's Encryption Regulatory Framework

India's cryptocurrency regulatory policy has undergone a process of strict restrictions to gradual adjustments. Initially, the Reserve Bank of India was highly skeptical of cryptocurrency, warning of investment risks in 2013. In 2018, it prohibited banks from trading with cryptocurrency-related businesses, but this was ruled unconstitutional by the Supreme Court in 2020.

The 2022 fiscal budget proposal for the first time included cryptocurrencies under legal regulation, establishing a 30% capital gains tax and a 1% withholding tax. The 2025 fiscal budget proposal did not undergo fundamental reforms, only strengthening reporting and information disclosure regulations, with plans to take effect in April 2026.

The Impact of New Tax Regulations

Despite a global trend towards easing, India maintains a stringent tax regime. The 30% tax rate is at an extreme level, not allowing deductions for losses or costs, which leads to businesses and investors relocating. The 2025 budget proposal expands the definition of "encryption assets" but does not categorize types, increasing compliance uncertainty.

The "Income Tax Law" imposes fines of up to 70% for unreported VDA, reflecting the government's high-pressure attitude. The broad definition leads to a heavy tax burden on users. In a harsh environment, local companies are migrating en masse, while the increase in market trading volume reflects the divergence between policy and reality.

Impact on Investors and the Market

Strict policies increase the operational difficulty for enterprises, prompting relocation. Although the Indian market remains vibrant, with an expected scale of $15 billion by 2035, excessive regulation may lead to capital outflows and limited innovation, affecting India's competitiveness.

Compliance complexity and legal uncertainty are another challenge. The comprehensive regulatory framework has yet to be established, and market participants face sudden policy changes and compliance risks, affecting long-term investments.

In summary, the Indian government has strengthened regulation on the grounds of financial stability, but strict taxation and vague frameworks restrict market innovation and impact global competitiveness. The government needs to seek a balance between protection and development, lower tax rates, clarify classifications, and reduce uncertainty to enhance confidence and attract capital. Otherwise, it may miss opportunities in blockchain and digital finance, while moderate adjustments could make it an important player in the global encryption market.