India's encryption regulation tightening: New tax rules in 2025 spark controversy

The Indian government's regulatory stance on encryption continues to tighten. The 2025 budget proposal further strengthens reporting requirements and regulatory mechanisms based on the 30% tax rate established in 2022. The 2022 Income Tax Act first included encryption assets in the tax system, but it does not allow trading losses to offset other income. The new provisions in the 2025 budget expand the scope of regulation, requiring relevant agencies to report encryption transactions in a timely manner. At the same time, the government has broadened the definition of encryption assets to encompass all assets based on distributed ledger technology. These changes coincide with a rise in Bitcoin due to positive news, but the market still faces regulatory uncertainty and volatility risks.

In recent years, the global regulatory attitude towards encryption has gradually become more flexible and prudent. However, India, as one of the most active countries in global cryptocurrency trading, has maintained strict regulations and harsh tax policies, falling behind the trend of friendly international regulations.

India's encryption tax system is considered one of the strictest in the world, which not only undermines investor confidence but also hinders the innovation and development of blockchain technology. Despite calls from the market to relax policies, the government's position remains unchanged. In the 2025 budget proposal and the amendment to the Income Tax Act, the Indian government has made some adjustments to the current tax system.

India's encryption regulation has evolved from strict restrictions to gradual adjustments. In the early days, the Reserve Bank of India held a highly skeptical attitude towards cryptocurrencies. In 2018, the central bank even prohibited banks from transacting with encryption-related businesses, but this ban was ruled unconstitutional by the Supreme Court in 2020.

The 2022 budget proposal was the first to bring encryption currency under legal regulation, establishing a 30% capital gains tax and a 1% transaction tax. The 2025 budget proposal did not implement fundamental reforms to the tax system, but merely strengthened reporting and information disclosure requirements.

The new tax regulations expand the definition of encryption assets, bringing all blockchain technology-based assets under taxation. However, no classification is made for different types of assets, increasing compliance uncertainty. The penalties for unreported encryption assets have been intensified, with a maximum of 70%, and no exemptions or reductions are provided.

The harsh tax environment has led to a massive outflow of local encryption companies from India, but market trading volumes continue to grow, reflecting a significant gap between policy and reality. Young investors still view encryption assets as an important source of income.

Another challenge facing the Indian encryption market is the complexity of compliance and legal uncertainty. Although the government has proposed to establish a comprehensive regulatory framework, it tends to prohibit mainstream encryption currencies and promote central bank digital currencies, resulting in the delay of the bill's implementation. In this environment, market participants face policy fluctuations and compliance risks, which affect long-term investments.

In summary, the Indian government needs to seek a balance between investor protection and market development, reduce tax rates, clarify asset classifications, and reduce legal uncertainties to enhance market confidence and attract capital. Otherwise, it may miss economic opportunities in the blockchain and digital finance sectors. If it can adjust its regulatory stance, India still has the potential to become a significant player in the global encryption market.