Why Everyone’s Right — and Everyone’s Losing: India’s Bitcoin Dilemma
Regulators fear scams, exchanges fear enforcement, traders fear taxes — and all sides lose. Smart Bitcoin policy can realign incentives and power India’s next wave of wealth creation.
This isn’t just a policy standoff — it’s a story of incentives pulling in opposite directions. To understand where we are and how we got here, it helps to trace the arc of India’s crypto journey — from early optimism to regulatory caution to today’s uneasy stalemate.
The Policy Journey So Far (2018–2025)
India’s approach to digital assets has evolved through cycles of enthusiasm, restriction, and confusion. Each milestone tells us what policymakers feared — and what investors hoped for.
2018 – RBI Ban
The Reserve Bank of India issued a circular banning banks from dealing with crypto-related businesses. This effectively froze the industry’s access to the financial system. With exchanges cut off, P2P markets became the only option for many Indians to participate.
2019 – SC Garg Committee Draft Bill
The Inter-Ministerial Committee chaired by Subhash Chandra Garg released a draft bill that sought to ban possession, mining, and trading of crypto altogether. It proposed harsh penalties, including fines up to ₹25 crore and jail terms of up to 10 years. Though never tabled in Parliament, it created a chilling effect that drove entrepreneurs abroad and added to the climate of uncertainty.
2020 – Supreme Court Overturn
In March 2020, the Supreme Court struck down the RBI circular as unconstitutional, reopening the doors for exchanges to reconnect with banking rails. But the habit of using P2P, normalized during the ban, continued.
2021–2022 – The Missing Bill
The much-anticipated “Cryptocurrency and Regulation of Official Digital Currency Bill” was listed for introduction in Parliament but never arrived. By early 2022, the bill had stalled indefinitely.
2022–2023 – Taxation Without Recognition
Instead of providing clarity through regulation, the government imposed a 30% flat tax on profits and a 1% TDS on transactions. Citizens suddenly bore the burden of taxation without the rights of legal recognition.
In the Finance Act 2022, Bitcoin and other tokens were defined broadly as “Virtual Digital Assets” (VDAs) under Section 2(47A) of the Income Tax Act. This definition includes cryptocurrencies, NFTs, and other digital codes or tokens. But recognition as a VDA does not equate them with legally recognized instruments like property or securities. Bitcoin remains in a grey zone — taxed, but without clear rights of ownership, transfer, or recognition in financial law.
Crucially, Section 115BBH of the Act imposes a 30% tax on VDA transfers, allows only acquisition cost as a deduction, and forbids offsetting losses — whether between different cryptocurrencies or against any other income. Losses cannot be carried forward either. In practice, an investor who loses ₹2 lakh on Ethereum and gains ₹1 lakh on Bitcoin in the same year still pays tax on the ₹1 lakh, despite being net negative overall. Put simply: profits are taxed, but losses cannot be netted off. This asymmetry discourages compliance, punishes diversified participation, and drives investors toward offshore or informal channels.
When clarity doesn’t come from the top, markets find their own way to adapt — and often, those adaptations reveal deeper systemic issues.
2018–Present – Rise of P2P Workarounds
The P2P channel has persisted for different reasons across time: necessity during the RBI ban, habit in the years following, and more recently as a way to avoid the 30% tax, find competitive rates, and escape the constraints of exchanges turned into “walled gardens.” The risk is clear: India already has a problem with UPI scams, and layering crypto P2P trades into the same environment only increases vulnerability. Honest customers get caught in bank freezes, and regulators lose oversight. The irony is that this can be avoided — by empowering exchanges to operate responsibly with proper KYC and compliance.
September 2024 – Missing Discussion Paper
A discussion paper on crypto regulation was expected but never arrived. Another missed chance for clarity.
August 2025 – BCCI Sponsorship Ban
The Board of Control for Cricket in India excluded crypto companies from sponsorships, grouping them with gambling, liquor, and tobacco. This reinforced the mistaken perception that Bitcoin is a vice, not an innovation.
The Exchange Dilemma
Exchanges in India today face structural contradictions. Under pressure from enforcement agencies like the ED to curb money laundering, they have become walled gardens, restricting bitcoin withdrawals and creating friction for users. The intent may be to stop illicit flows, but the effect has been to frustrate customers and reduce liquidity.
The core concern driving this pressure is the fear that exchanges enable laundering through withdrawals. Yet history shows that centralized exchanges are not safe havens anyway. Globally, most large platforms have been hacked, and India has not been spared — WazirX was hacked in 2024 and CoinDCX in 2025. If exchanges themselves cannot protect their platforms, users will inevitably turn to governments demanding answers. The real answer, however, lies elsewhere: encouraging responsible self-custody. Just as Indians keep gold safe in their homes or lockers, Bitcoin — digital gold — can be secured with private keys outside exchanges. For long-term holders, this is the rational way to ensure safety.
But not all users are long-term holders. For active traders, the pressures are very different. The 30% tax on gains and the 1% TDS on every transaction have made frequent trading on centralized platforms punitive. Even traders who end up net negative still suffer tax outflows on their winning trades. This erosion of margins has pushed many to seek relief in P2P markets, where trades can be structured more competitively and outside the reach of TDS. The problem is that this exposes them to fraud, especially in a low-trust environment where UPI scams are already common.
This is where enforcement needs a reset. The ED already has access to KYC records from centralized exchanges. The right approach is to hold platforms accountable for the quality of their KYC and AML processes, not to punish them for providing withdrawals or other core functions. Restricting withdrawals leaves users who keep their assets on centralized exchanges exposed — sitting ducks for the next inevitable hack. History has shown that it’s not a question of if but when: exchanges are prime targets, irresistible honeypots for attackers. Meanwhile, users who avoid these walled gardens to protect themselves are pushed toward P2P or decentralized platforms — riskier grey zones where oversight is weaker and scams more common. A smarter regulatory stance would empower exchanges to protect customers, while giving investors and traders the freedom to secure or trade their assets responsibly.
These structural contradictions have made it hard to separate legitimate caution from misplaced skepticism. Nowhere is this clearer than in how Bitcoin continues to be conflated with the rest of “crypto.”
Government Perceptions vs. Reality
The government’s concern about financially illiterate citizens losing money is valid. This is why crypto advertising was asked to tone down, and the industry responded by adopting self-regulation. But equating Bitcoin with gambling, liquor, or tobacco is misguided.
Bitcoin is not just another “crypto.” Unlike altcoins, it is decentralized, capped at 21 million, and has a flawless track record of security and uptime. Most altcoins are admittedly speculative experiments. Bitcoin, by contrast, is the first true form of digital scarcity — an asset class in itself. Mislabeling it blinds policymakers to its role in the global financial system.
While India remains hesitant, the rest of the world has been moving decisively — often guided by pragmatism rather than fear.
Global Proof Points
The United States launched spot Bitcoin ETFs in January 2024, cementing Wall Street’s embrace of the asset. BlackRock’s iShares Bitcoin Trust (IBIT) is on track to reach $100 billion in assets under management within just 14 months — the fastest in history by a wide margin. The previous record holder, Vanguard’s S&P 500 ETF (VOO), took five and a half years to cross the same mark.
MicroStrategy — now rebranded as Strategy — wrote the original playbook for public companies holding Bitcoin as part of their corporate treasury. Its success in leveraging capital markets to accumulate Bitcoin has inspired a wave of similar strategies worldwide.
Since MicroStrategy’s first purchase in 2020, public companies have steadily expanded their Bitcoin holdings, and that trend has only accelerated after the approval of U.S. Bitcoin ETFs.
El Salvador recognized Bitcoin as legal tender in 2021, began buying 1 BTC a day in 2023, and mines Bitcoin with geothermal energy from volcanoes. Bhutan has quietly mined Bitcoin with hydropower since 2019. Oman and the UAE are investing in large-scale, energy-backed mining projects.
The FATF (since 2019) and G20 (Bali 2022, India’s presidency in 2023) have consistently advocated for regulation, not bans. India has endorsed this stance internationally but failed to act domestically. Time is of the essence here: as the world moves forward with Bitcoin, delays only hurt India’s competitiveness and long-term wealth potential.
UAE, Portugal (0% until 2022), Germany (exemptions for long-term holders), Switzerland, and Singapore have all offered favorable regimes to attract Bitcoin capital and talent. India risks brain drain and capital flight as entrepreneurs and wealth migrate to these friendlier jurisdictions.
These examples underline a simple truth: Bitcoin is no longer a fringe experiment. It has become a core pillar of modern finance — a neutral, borderless store of value that countries are beginning to integrate into their economic strategy.
Bitcoin vs. Gold
Bitcoin’s market cap is already $2.3 trillion. At $1.4 million per coin, it would surpass gold. And there is no reason why Bitcoin will not hit $1.4 million someday - as people, slowly but surely, continue waking up to the hardest asset the world has ever known. And it has clear advantages over gold:
Transparency: Bitcoin holdings are auditable on-chain; gold reserves are opaque.
Liquidity: Bitcoin trades 24/7 globally; gold markets are limited.
Settlement speed: Bitcoin clears in minutes; gold takes days.
Storage costs: Bitcoin can be held with private keys; gold requires vaults and insurance.
And unlike gold, Bitcoin is divisible, authentic by design, and portable at the speed of the internet. Its only disadvantage is its youth — sixteen years versus gold’s millennia.
India’s Edge
If Bitcoin is global digital gold, then India — home to both the largest base of digital users and the world’s deepest cultural affinity for gold — stands at the crossroads of tradition and technology.
Indians have always understood the instinct to hold — to HODL — assets that protect value across generations. For centuries, gold has been our preferred store of wealth. Bitcoin now extends that same instinct into the digital era.
India is uniquely placed to lead. With a digitally savvy population of 1.4 billion, and proven public infrastructure like UPI and Aadhaar, we are primed for digital adoption. Culturally, we are savers — the world’s greatest HODLers of gold. Bitcoin is simply digital gold for the 21st century: divisible, portable, and verifiable.
For a nation of savers, this evolution from gold to Bitcoin is not a departure — it’s a natural progression. India has the digital infrastructure, entrepreneurial energy, and demographic scale to leapfrog the legacy phase of wealth storage and move directly into the future of value. That is precisely why now is the time to act.
But having the right ingredients is not the same as baking the cake. India’s edge will mean little unless it translates into tangible wealth creation and inclusion.
National Imperatives
India’s biggest challenge is wealth creation at scale. Millions remain in poverty. Smart Bitcoin policy can channel capital formation and empower citizens broadly, not just elites. Failure will only accelerate the brain drain and capital flight already underway.
Other nations are already competing aggressively. UAE, Germany, Switzerland, Singapore, and El Salvador are attracting Bitcoin wealth with favorable regimes. Smart money goes where it is treated best. If India remains punitive, it will lose not just capital but jobs, innovation, and domestic spending power.
Behind every policy delay and every market workaround lies a set of rational choices made within irrational systems.
But to understand why India has ended up in this position — with missed opportunities, capital flight, and mistrust — we must look not just at policies, but at the motivations of the players who shaped them.
Players, Motivations, and Outcomes
India’s crypto landscape has not been shaped by technology alone but by the motivations of its key players. Each has acted rationally within its own frame of incentives — yet the combination has created unintended outcomes that hurt everyone.
For the RBI and government, the motivation has always been control and risk management. With memories of financial scams and a duty to protect retail investors, the instinct was to ban, restrict, or tax heavily. This reduced exposure but also suppressed innovation and drove activity underground.
For enforcement agencies like the ED, the priority has been curbing money laundering. That led to pressuring exchanges into walled gardens, where withdrawals became restricted. While the intent was to reduce illicit flows, the outcome has been the opposite: users are driven to riskier P2P channels where oversight is weaker and scams proliferate.
For exchanges, the motivation is survival in a hostile climate. They complied with every demand, but hacks like WazirX (2024) and CoinDCX (2025) showed their structural vulnerability. Customers lost trust, and even honest operators were painted with the same brush as bad actors.
For traders, the driver is efficiency. The 30% tax on profits and the 1% TDS on every trade eat away margins, so they moved to P2P markets where compliance burdens are lower and pricing more competitive. Ironically, this exposed them to higher risks and left regulators with less visibility.
For long-term Bitcoin holders, the motivation is not short-term gain but financial security and sovereignty. Self-custody has always been the gold standard for protecting Bitcoin. What they now seek is regulation that rewards prudent, long-horizon investing — an approach that aligns with Bitcoin’s design and rewards patience.
Globally, nation states and financial institutions are motivated by competitiveness. The U.S., UAE, and others are building welcoming regimes to attract Bitcoin wealth, talent, and investment. Their outcomes are predictable: capital inflows, innovation, and strategic positioning. India risks being left behind.
What this analysis shows is that despite the conflicts, everyone ultimately wants the same thing: security for investors, compliance for regulators, survival for exchanges, and growth for the nation. The challenge is to align these motivations into a win-win-win framework that discourages harmful behavior while encouraging participation, innovation, and wealth creation.
If India’s Bitcoin story so far has been about misaligned incentives, the next chapter must be about intelligent alignment — policies that reward responsibility rather than reaction.
Solutions
India must differentiate Bitcoin from crypto and encourage responsible investing. The model is simple:
20% on short-term gains (if held for <4 years)
0% on long-term gains (if held for >4 years)
This approach aligns with Bitcoin’s four-year halving cycle, which has historically been directionally positive for price over time. By encouraging a long-term horizon, it helps smooth out volatility, frames Bitcoin as an investment rather than speculation, and sends a clear signal that India is ready to reward patience and responsibility.
One reform worth considering is to treat Bitcoin at par with other long-term capital assets such as equity — allowing limited loss offset or carry-forward within that framework. Today, investors cannot net profits and losses or carry forward losses on digital assets, even when the intent is responsible, long-term participation. Extending such provisions exclusively to Bitcoin would bring coherence to the tax code, encourage compliance, and reinforce that India distinguishes between speculative trading in altcoins and disciplined, long-horizon investment in Bitcoin.
The direction of policy will decide whether India becomes a hub of digital wealth or a spectator watching capital flow elsewhere.
Closing
The current system fosters a cat-and-mouse game: citizens trying to avoid an extractive 30% tax, regulators trying to catch them. It wastes time, energy, and trust. A progressive system would reward the right behavior, for the right asset, with the right incentive. The outcomes: wealth creation, stronger domestic spending, poverty reduction, and a more resilient economy.
Bitcoin is a rising tide that lifts all boats. For the first time in history, every individual can join a global network that benefits all participants. The only question is whether India chooses to board the boat now, or later at a much higher cost — and what price of entry we end up paying. Smart Bitcoin regulation is not hype — it is about giving 1.4 billion Indians a fair shot at wealth, dignity, and a stronger future.
The world has moved from ignoring Bitcoin to integrating it. India’s choice now is not between risk and safety — but between hesitation and leadership.
Very detailed and clearly explained, thank you, Kamal!