Punishment For Crypto Trading In India

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In general, there are no direct punishments for trading cryptocurrencies. Crypto trading is legal in India, however, it is subject to strict taxation and regulatory oversight. Profits from cryptocurrency trades are taxed at a flat rate of 30%, with no allowances for offsetting losses. Additionally, a 1% Tax Deducted at Source (TDS) applies to all transactions, ensuring the government tracks crypto trades.

Cryptocurrencies are rapidly gaining popularity in India, attracting millions of investors due to their decentralized nature and potential for high returns. The number of cryptocurrency traders in the country has increased significantly over the past few years, despite the unclear legal framework. At the same time, the Indian government is actively implementing new laws and regulations to regulate the market, including taxes and anti-money laundering measures. The introduction of such measures is associated with an attempt to control the risks associated with financial crimes and investor protection. Traders need to understand these legal requirements and potential penalties to avoid fines and legal consequences, which is what we will discuss in this article.

Cryptocurrency regulation in India: restrictions and penalties

The Indian government is actively working on introducing regulations to regulate the cryptocurrency sector. The main regulator is the Reserve Bank of India (RBI), which is extremely cautious about cryptocurrencies, sometimes even comparing them to fraudulent schemes. RBI insists on strict control in the field of digital asset circulation, based on the postulate that cryptocurrencies pose a threat to the country's financial system.

A significant step in this matter was the adoption of a number of regulations on Virtual Digital Assets (VDA), as they are called in Indian law. The most important changes in the "digital" legislation took place in 2022-23.

Taxation of cryptocurrencies. In 2022, as part of the budget for 2022-23, a new tax regime for cryptocurrency transactions was introduced:

30% tax on profits from trading cryptocurrencies without the possibility of offsetting losses.
1% tax at source (TDS) on every cryptocurrency transaction, effective July 2022.

These measures were aimed at making cryptocurrency transactions more transparent and bringing them under the official tax scrutiny.

Prevention of Money Laundering Act (PMLA), March 2023. One of the most significant steps in regulating the cryptocurrency market was the inclusion of VDAs transactions under the purview of the Prevention of Money Laundering Act (PMLA). This change came into effect in March 2023. Since its enforcement:

Companies involved in the exchange, custody and transfer of VDA s are now considered "reporting entities".
All crypto platforms are required to adhere to strict KYC and AML regulations. This includes verifying customers, monitoring their transactions and mandatory reporting of any suspicious transactions to the Financial Intelligence Unit-India (FIU-IND).
Violation of these requirements carries serious penalties, including fines and, in some cases, criminal liability.

Responsibilities of cryptocurrency exchange participants

Cryptocurrency exchanges. Must conduct full verification of clients, record their data, and keep transaction records for 5 years.
Cryptocurrency storage platforms. Must monitor and protect client assets, and report any attempted security breaches or fraud.
Trader кesponsibilities. Traders are required to declare their income from cryptocurrency trading and pay the appropriate taxes. Violating tax laws or participating in money laundering may result in fines or criminal prosecution.

These laws have increased controls in the digital finance sector, and are aimed at combating illegal financial transactions. But they have also led to many traders preferring foreign exchanges to bypass strict tax requirements.

Legal restrictions and penalties for cryptocurrency trading in India

The current regulatory framework for cryptocurrency trading in India provides for severe penalties for violating laws. The main offenses include tax evasion, involvement in money laundering, and illegal use of cryptocurrencies, which can lead to severe legal consequences for traders and exchange operators.

Penalties for tax evasion. In 2022, India introduced strict tax rules for cryptocurrency transactions. All income from cryptocurrencies is taxed at 30%, and 1% tax at source (TDS) is levied on each transaction. In case of evasion of TDS or underpayment of tax, traders may face fines equal to the amount of tax and/or imprisonment for a term ranging from 3 to 7 years.
Involvement in money laundering. From March 2023, cryptocurrency companies in India are required to comply with the Prevention of Money Laundering Act (PMLA). This includes KYC and transaction monitoring requirements. Failure to comply with these rules can result in fines, confiscation of assets, and imprisonment for up to 7 years.

How new laws affect traders in India. Tax burden

The new legislation regulating the circulation of digital assets in India has a significant impact on local traders and crypto exchanges. Here's what it looks like in terms of tax burden:

30% income tax. All income received from the sale or trading of cryptocurrency is taxed at 30%. This tax applies to all types of income from cryptocurrency, including profits from trading, exchanging, or selling crypto assets. However, there is no provision for compensation for losses from other assets. This means that if a trader has a loss on one cryptocurrency and a profit on another, the losses cannot be deducted from the taxable base.
1% TDS (tax at source). From July 1, 2022, all cryptocurrency transactions are subject to a 1% tax withholding at the time of sale, exchange, or transfer of crypto assets. This tax is applicable to all transactions if the annual transaction volume exceeds ₹50,000 for individuals and ₹10,000 for other categories of taxpayers. TDS applies even to crypto-to-crypto transactions, making both the seller and the buyer liable for the tax.

Impact on traders and domestic exchanges

These new tax rules have led to a sharp decline in trading volumes on local exchanges. Many traders prefer to use international platforms to circumvent the strict tax laws, which significantly reduces the liquidity on Indian platforms. Moreover, high taxes and the inability to recoup losses make cryptocurrencies less attractive for long-term investment in India.

Use of foreign exchanges

Due to the imposed taxes, many Indian traders have started switching to foreign cryptocurrency exchanges where local withholding tax laws do not apply. However, trading on such platforms is risky, as using international exchanges requires users to independently declare profits and withhold TDS. Traders using P2P platforms or foreign exchanges are required to monitor their transactions independently and pay TDS as per Indian law.

We have selected several international crypto exchanges that are available for trading in India. They are distinguished by a high level of security and a wide range of trading assets. On these platforms, your trading will be easy and convenient.

Best crypto exchanges in India
	Coins Supported	Min. Deposit, $	Spot Taker fee, %	Spot Maker Fee, %	Open account
OKX	329	10	0,1	0,08	Open an account Your capital is at risk.
Kraken	278	10	0,4	0,25	Open an account Your capital is at risk.
Crypto.com	250	1	0,5	0,25	Open an account Your capital is at risk.
CoinMetro	72	1	0,2	0,1	Open an account Your capital is at risk.
Ledger Wallet	1817		0	0	Open an account Your capital is at risk.

Monitor your tax obligations and consult with tax professionals

With the tightening of regulations in India, crypto traders should pay special attention to taxation and asset security. Carefully monitor your tax obligations, especially if you are using foreign exchanges that do not have automatic withholding of taxes. Many traders naively believe that using P2P platforms or international exchanges allows you to avoid paying taxes, but this can lead to serious fines and even jail time in case of failure to comply with declaration obligations.

To ensure asset security, it is important to use only exchanges that comply with Indian laws, especially the new KYC and AML regulations. Failure to comply with these requirements will lead to financial losses and legal consequences such as asset freezing or fines for violating government regulations. Choosing reliable platforms and using hardware wallets can reduce the risks of fraud and theft of funds.

Given the strict regulation of cryptocurrencies in India, traders should consult with tax experts in advance to optimize their tax strategy. This will help avoid unpleasant surprises in the future and reduce the risk of misuse of assets, which is especially important in the context of increasing market transparency and the government's proactive stance on cryptocurrency control.

Conclusion

Cryptocurrency trading in India comes with significant legal and financial risks, especially given the introduction of strict tax regulations, AML and KYC compliance requirements. A tax rate of 30% on profits and 1% TDS on each transaction makes trading less profitable for many market participants. Additionally, failure to comply with tax obligations can result in severe penalties, including fines and jail terms. We recommend using reputable exchanges that comply with Indian laws. Investors should also constantly monitor changes in cryptocurrency regulations and consult with legal and tax professionals to avoid unpleasant consequences in the future.

FAQs

How can traders minimize tax liability when trading cryptocurrency in India?

Traders can reduce their tax liability by planning their trades over the long term and avoiding frequent transactions. Keep a close track of all transactions to ensure proper tax returns. It is best to keep records of profits and TDS paid so that you can claim a refund at the end of the year if necessary.

How to keep your crypto assets safe in India?

To protect your assets, use hardware wallets that are not connected to the internet and enable two-factor authentication. Splitting your assets across multiple platforms and regularly updating your passwords will also help minimize the risk of hacking. Avoid storing significant amounts on exchanges as they may be vulnerable to attacks.

What are the risks of using foreign crypto exchanges for Indian traders?

Traders risk facing difficulties in fulfilling their tax obligations in India when using foreign crypto exchanges. Such exchanges may not automatically withhold TDS, making it the responsibility of traders to file their own reports. This could lead to fines for undeclared income, as well as difficulties in complying with Indian KYC and AML requirements.

How can traders best prepare for future changes in cryptocurrency laws?

To prepare for future changes, traders should monitor crypto regulation news, actively consult with tax and legal experts, and use only reputable exchanges that comply with the country's laws. This will help avoid problems with tax authorities and minimize the risks associated with sudden changes in regulations.

Team that worked on the article

Andrey Mastykin is an experienced author, editor, and content strategist who has been with Traders Union since 2020. As an editor, he is meticulous about fact-checking and ensuring the accuracy of all information published on the Traders Union platform. Andrey focuses on educating readers about the potential rewards and risks involved in trading financial markets.

He firmly believes that passive investing is a more suitable strategy for most individuals. Andrey's conservative approach and focus on risk management resonate with many readers, making him a trusted source of financial information.

Also, Andrey is a member of the National Union of Journalists of Ukraine (membership card No. 4574, international certificate UKR4492).

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Chinmay Soni is a financial analyst with more than 5 years of experience in working with stocks, Forex, derivatives, and other assets. As a founder of a boutique research firm and an active researcher, he covers various industries and fields, providing insights backed by statistical data. He is also an educator in the field of finance and technology.

As an author for Traders Union, he contributes his deep analytical insights on various topics, taking into account various aspects.

Mirjan Hipolito is a journalist and news editor at Traders Union. She is an expert crypto writer with five years of experience in the financial markets. Her specialties are daily market news, price predictions, and Initial Coin Offerings (ICO).

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