India’s crypto market has quietly inverted. Spot trading, once the default route for buying Bitcoin or Ethereum, has been reduced to a sideshow, while futures and other derivatives now command 80% or more of total volume on domestic exchanges, according to a recent report citing exchanges and industry experts. The force behind the migration is not market conviction. It is the tax code.
A Tax Regime That Picks Winners
The distortion traces back to the Union Budget 2022, which imposed a flat 30% tax on gains from Virtual Digital Assets (VDAs) under Section 115BBH and a 1% Tax Deducted at Source (TDS) on every spot transfer under Section 194S. For active traders, that TDS is not a rounding error. It is deducted on each trade, locking up working capital with every round trip and making high-frequency spot strategies economically unviable.
Futures contracts sidestep the levy entirely. Because a derivatives position involves no actual transfer of a VDA, many tax professionals classify futures profits as speculative business income taxed at slab rates, a treatment that also permits loss set-offs. The 30% VDA regime strictly prohibits offsetting losses, even between two cryptocurrencies.
The result is a structural arbitrage: identical market exposure, radically different tax outcomes. Traders have responded rationally, and daily transaction values across domestic exchanges are now estimated at nearly $5 billion.
Retail is Bleeding on Both Sides of the Market
The volume boom conceals an uncomfortable ledger. Internal data from Indian platforms, shared on condition of anonymity, indicates that roughly 70% to 80% of participants in the crypto derivatives segment are sitting on losses, with individual investors driving about 70% of futures activity and absorbing the bulk of the damage.
The pattern mirrors what the Securities and Exchange Board of India (SEBI) has already documented in traditional markets. The regulator’s July 2025 study found that 91% of individual traders in equity F&O lost money in FY25, with net losses widening 41% to Rs 1.05 lakh crore and cumulative retail losses since FY22 approaching Rs 2.88 lakh crore. That evidence pushed SEBI into a series of curbs on equity derivatives, from rationalising weekly expiries to mandating loss disclosures at broker login.
Nor is the problem uniquely Indian. The Moneycontrol report notes that American retail participants have racked up an estimated $2.3 billion in cumulative deficits in crypto futures, suggesting the product category itself, not just local tax quirks, tilts against small traders.
Leverage Without Guardrails
What separates crypto futures from their equity cousins is the total absence of a rulebook. Cryptocurrency in India is defined as neither a currency, a commodity, nor a security, so neither SEBI nor the Reserve Bank of India (RBI) claims jurisdiction over trading.
Under SEBI regulations, equity derivatives traders can access at most five times leverage. In crypto, some smaller exchanges reportedly offer up to 100x, and crypto exchange Giottus estimates that a typical futures trader averages more than 50 trades a month.
Moin Ladha, partner at law firm Khaitan & Co, stated there is “a case for a calibrated regulatory framework” for crypto futures, pointing to their leveraged nature and the volatility of the underlying assets compared with equity derivatives tied to listed companies and established market infrastructure. He argued that a considered approach could strengthen investor protection without stifling innovation.
Behind the scenes, the Financial Stability and Development Council (FSDC), a non-statutory body under the finance ministry, has reportedly asked the RBI and SEBI to consider regulating the sector, according to sources cited in the report. But a government official quoted in the report described an institutional standoff: the RBI has been nudging responsibility toward SEBI, and no agency wants to take ownership because regulation would amount to formally recognising crypto, something the government has resisted.
The official also warned that if an unregulated exchange collapses, investors would have no recourse, unlike the safeguards built into equity markets.
The Offshore Drain Compounds the Problem
The tax wedge has not just reshaped what Indians trade. It has reshaped where they trade. Around three-fourths of Indian crypto activity now flows through foreign platforms such as Binance and Bybit, largely to escape local taxes.
Ministry of Finance data disclosed in the Rajya Sabha in December 2025 put declared domestic VDA transaction value at Rs 51,180 crore for FY2024-25, yielding Rs 511.83 crore in TDS. Those official figures capture only compliant domestic spot trading, leaving the far larger derivatives market and offshore volumes invisible to the exchequer.
Independent estimates paint the leakage in starker terms. Roughly 72.7% of India’s crypto trading volume has migrated offshore since the 2022 tax regime took effect, and MP Raghav Chadha told Parliament during the Budget 2026-27 debates that over 180 Indian crypto startups have relocated abroad. The 18% GST applied to trading fees since July 2025 has only widened the gap between onshore and offshore costs.
Exchanges Point to a Different Growth Story
Domestic platforms, for their part, argue the volume mix is less speculative than the headline numbers imply. Prateek Gupta, Head of Business at Mudrex, shared that tokenized real-world assets (RWAs) now contribute close to 15% of the exchange’s combined spot and futures volume, a share it expects to climb to 20% to 25% over the coming quarters.
Gupta noted that tokenised RWAs globally have crossed $25 billion this year, and that bringing traditional assets on-chain frees investors from market hours, geography and high minimum ticket sizes.
A Reckoning May Be Near
The timing of the derivatives boom is awkward for policymakers. The RBI has just formally backed a prohibition on private cryptocurrencies in submissions to the Union government, arguing that regulation would legitimise the sector, even as the Central Board of Direct Taxes flags structural tax-evasion risks from VDAs.
Meanwhile, the Parliamentary Standing Committee on Finance is preparing to table its long-awaited report, A Study on Virtual Digital Assets and Way Forward, in the ongoing Monsoon Session after hearings with exchanges, the RBI, SEBI, and the tax department.
For now, India occupies a contradictory position. It leads the Chainalysis Global Adoption Index for the third straight year with an estimated 119 million users, taxes the sector aggressively, and yet declines to regulate the fastest-growing and riskiest corner of it. The 1% TDS was designed as a tracking tool. Four years on, its most measurable achievement may be herding retail traders into leveraged, unregulated derivatives where the house data says most of them lose.
Also Read: The Wall Around Mint Street: How the RBI Spent a Year Shutting Crypto Out of Indian Banking
