On February 24, Indian crypto exchange WazirX abruptly shut down its NFT marketplace “due to low volume and traction.” The company said it had collected a fee of just around $6 over the past 30 days while its “server expenses are in thousands of dollars.”

The development occurred about a month after WeTrade, an Indian cryptocurrency trading app, suddenly paused operations due to the “crypto winter deepening and the ambience turning increasingly hostile.” WeTrade had originally targeted a turnover of 100 crore rupees (around $12 million) for the 2023 financial year.

WeTrade and WazirX’s NFT marketplace are just two among many casualties of the Indian government’s decision to bring crypto and virtual digital assets under its tax ambit. Since April 2022, all income from crypto and virtual digital assets in India has been taxed at a hefty 30%, with an additional 1% charged as tax deducted at source (TDS) for every transaction over 10,000 rupees ($121).

High taxes have almost killed the cryptocurrency ecosystem in India, crypto investors and entrepreneurs told Rest of World. “WazirX saw a 63% trading volume decline a day after the imposition of TDS,” said Rajagopal Menon, vice president at WazirX. “To date, our volumes have been impacted by 90% because of the tax impositions.” He added that Indian exchanges have seen a severe decline in metrics such as app downloads, website traffic, and exchange volumes, which has, in turn, benefited global exchanges.

Trading volumes across Indian cryptocurrency exchanges fell by around 70% after this tax regime was announced, Vikram Subburaj, co-founder of crypto exchange Giottus, told Rest of World. “This also impacted tax realization for the government,” he said.

“It makes no sense for me to invest in crypto in India.”

Cryptocurrency trade in India is shifting to offshore platforms following the new tax policy, noted a January study by tech policy think tank Esya Centre. Between February and October 2022, Indian investors moved a cumulative trade volume of $3.85 million to foreign crypto exchanges, the study estimates. Four out of the 10 investors who spoke to Rest of World for this story said they had stopped trading in virtual digital assets due to the high taxes, the global volatility in such assets, and allegations of fraud against FTX founder Sam Bankman-Fried. Three crypto investors said they’re in “watch mode” and not deploying any fresh funds, while the other three said they have already begun shifting their crypto trades offshore.

“It makes no sense for me to invest in crypto in India,” Sanjeev K, a crypto investor based in Mumbai, told Rest of World. “I can avoid such large taxes by making use of the perfectly legitimate LRS [Liberalised Remittance Scheme] route to invest offshore in Dubai and Singapore, where I anyways have business interests.” The Liberalised Remittance Scheme allows Indians to freely remit up to $250,000 every financial year for current or capital account transactions, or a combination of both.

Singapore and Dubai have low to negligible taxation, and are positioned as crypto-friendly jurisdictions for both investors and exchanges. In Singapore, cryptocurrency is seen as an intangible asset, so profits generated from such trade are tax-free. In Dubai, residents do not need to pay any personal income tax. The U.S. — a major market for crypto assets — taxes long-term capital gains up to 20%, with provisions to offset losses. Meanwhile, Belgium, Iceland, Israel, the Philippines, and Japan place some of the highest taxes on crypto assets — ranging from 33% to 50%, as per global crypto-ranking site Coincub. At 30%, India’s tax rates aren’t too far behind.

Rahul Pagidipati, chief executive officer of Indian crypto exchange ZebPay, told Rest of World the new tax regime for crypto was similar to other taxed activities, such as gambling, that the government seeks to disincentivize.

The former finance secretary, Subhash Chandra Garg, who also headed a government panel on cryptocurrencies, told Rest of World the high rate of taxation on virtual digital assets was meant to be “adversarial.”

30% India’s tax rate for digital asset income.

“The logic of the regime is to get information, make intermediaries report every transaction, and tax this ‘illegitimate’ income at the highest rate,” he said. “The exchanges were looking for some legitimacy. They were not recognized or regulated but they were operating, so it was like the dabba trade that happens in stock exchanges.” Dabba trade refers to an informal market in India where people bet on prices of stocks without any actual stock trading hands. 

The finance ministry did not respond to Rest of World’s email seeking comment on the high taxation on cryptocurrencies.

In December 2022, the Indian government teamed up with the country’s central bank, the Reserve Bank of India, to launch a pilot program featuring its own digital currency, the e-Rupee. This was done to facilitate secure, low-cost online payments — the original use case for private cryptocurrencies.

Indian investors are also wary of local cryptocurrency exchanges due to the uncertain regulatory environment. Government officials have clarified that the taxation does not mean cryptocurrencies have been legalized.

“The logic of the regime is to … tax this ‘illegitimate’ income at the highest rate.”

“There is a lot of policy resistance to crypto in India,” Neha Shah, a Mumbai-based teacher, told Rest of World. Shah stopped investing in cryptocurrency after the new taxes were introduced. “I wouldn’t want to leave my money in Indian exchanges when they are facing tax scrutiny and raids. The risk of government scrutiny is not worth the trading opportunity,” she said.

This crisis of faith from investors has left the Indian cryptocurrency industry at a crossroads, but some remain hopeful.

Sumit Gupta, co-founder and chief executive officer of crypto investment app CoinDCX, told Rest of World it was heartening to see India raise the crypto regulation issue at global forums like the G20 Summit. He is confident that eventually, India will drop or lower the TDS provision — a move that would not only stem the loss of crypto trading volumes from Indian exchanges but also spur a “multi-fold increase.”

“The authorities should consider lowering the TDS rate,” a spokesperson from crypto trading app CoinSwitch told Rest of World. “Similar to regulated assets, existing provisions of capital assets can be made applicable for VDAs [virtual digital assets].” The government must also consider letting investors offset their trading losses from the sales of such digital assets as it would for capital gains on other investments, they added.