Stories
Crypto Derivatives Need Income Reporting Transparency, Not New Taxes
- •India's virtual digital asset sector has expanded rapidly, with user numbers growing significantly and massive TDS collected over recent fiscal years.
- •While spot trades attract a 1% TDS collection mechanism, derivative trades do not, though both remain fully taxable under existing income tax laws.
- •Imposing strict domestic compliance without global reach risks shifting crypto trading activity to offshore platforms, as seen with spot trading trends.
- •Extending the OECD Crypto-Asset Reporting Framework to cover all persons and VDA derivatives can ensure transparency without altering tax policies.
Key Questions Answered
Both income from a VDA spot trade and income from a VDA derivative trade are fully taxable in the hands of the trader. The primary structural difference is that spot trades trigger a 1% Tax Deducted at Source (TDS) under Section 194S, whereas derivatives do not attract TDS because a transfer only occurs in spot transactions. However, the absence of TDS on derivatives does not mean the income is exempt; the trader's obligation to report and pay tax exists independently.
Following the introduction of the 1% TDS regime for VDA spot trades in July 2022, trading activity rapidly migrated to offshore exchanges to avoid compliance burdens, with estimates showing roughly 90% of India's VDA trading volume occurring on foreign platforms. This shift removed transaction traceability, KYC availability, and caused a loss of income tax previously paid by domestic VDA exchanges.
Authorities can extend the Crypto-Asset Reporting Framework (CARF) obligations—which enable automatic exchange of user and transaction information—to all persons including residents and VDA derivatives. Combined with existing PMLA registrations for derivative exchanges and AI analytics, this allows the CBDT to cross-check disclosed income against actual trading activity without changing the underlying tax policy.
