India’s cryptocurrency regime embodies one of the most striking contradictions in contemporary financial law: Taxing the digital assets yet refusing to recognise them legally. This dualism raises further questions regarding fiscal legitimacy, regulatory coherence and constitutional rationality.
From the Reserve Bank of India's (RBI) initial advisory in 2013 to Finance Minister Nirmala Sitharaman's 2025 statement on stablecoins, India's virtual digital asset (VDA) strategy has evolved from caution and prohibition to judicial correction and now includes selective taxation.
This article traces the evolution from RBI’s initial warnings and the 2018 banking ban to the Supreme Court’s intervention in Internet and Mobile Association of India (IAMAI) v. RBI (2020), and finally to the legal and constitutional dilemma posed by the current “taxed but unregulated” framework.
The RBI's initial public comments on virtual currencies appeared on December 24, 2013, issuing a veiled warning to users that Bitcoin and other virtual currencies were neither approved by any central bank nor risk-free and subject to the risk of volatility and abuse. But it did not call them illegal and instead took a wait-and-see, precautionary approach.
In 2017, amid Bitcoin’s meteoric rise, the RBI and Finance Ministry reiterated these warnings. They clarified that no entity had been authorised to operate cryptocurrency exchanges or schemes. This phase showed a global trend of regulators being unsure, accepting new ideas, but worrying about financial instability and illegal use.
The regulatory tone took a stern turn with the April 6, 2018, RBI circular, which prohibited all banks and financial institutions from providing any services to parties related to cryptocurrencies. The notification was issued in exercise of the Banking Regulation Act, 1949 and the RBI Act, 1934. It effectively strangled the realm of cryptocurrencies without laying out any statutory prohibitions.
By disconnecting bank account access, exchanges lost the mechanism to permit deposits, payouts or conversions, leaving cryptocurrencies essentially unusable. This circular equated to regulatory overreach, prohibiting actions by executive decree rather than statutory power.
The COurt delivered its historic judgment in Internet and Mobile Association of India in 2020, setting aside the 2018 circular as unconstitutional.
It inquired into three major questions:
Whether the RBI had authority over cryptocurrencies
Whether the restriction satisfied the doctrine of proportionality
Whether it violated Article 19(1)(g) of the Constitution, which is the fundamental right to trade and business.
The Court stated that the circular did not pass the proportionality test. However, it also acknowledged that the RBI had the general power to maintain economic stability. There was no evidence that cryptocurrency exchanges harmed the banking system in any way. The RBI didn't attempt to use less stringent measures before implementing almost complete bans.
The Court's statement that "regulation would be a more proportionate response than prohibition" became the basis for all digital economy case law. The ruling also had doctrinal importance: it reaffirmed the Court's power to review economic regulation, called for economic policy based on facts and gave new digital businesses constitutional protection.
The Supreme Court's mention of the constitutional principle of proportionality is what makes the March 4, 2020 decision so important. Even though the power of the RBI stood, the exercise of that power had been found to be disproportionate to the objectives as announced.
The rule of proportionality demands that any restriction imposed on an essential right, such as the right to pursue a profession, must have a reasonable nexus to the object sought to be achieved and be not out of proportion to harm which it seeks to prevent. The Court noted that notwithstanding repeated reprimand by the RBI since 2013, the central bank could not provide a "modicum of evidence" indicating that the crypto-sector's involvement with regulated players had caused actual measurable systemic loss.
The Court held that the complete banking prohibition was an excessive and disproportionate instrument. It viewed the RBI's extreme action as not justified because there was no visible harm that was bad enough to warrant a complete denial of banking access. The IAMAI decision prompted the government to revise its approach by invalidating the 2018 circular. It did this by requiring a higher standard of evidence for regulatory intervention and effectively making VC trading through formal banking channels legal again.
After the judgement was delivered, the government's position was still unclear. The Subhash Garg Committee Report (2019) suggested a total ban on private cryptocurrencies and harsh punishments for activities related to them. It also suggested a framework for a Central Bank Digital Currency (CBDC). But after the Court's decision in 2020, the government seemed to change its mind.
The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 proposed to prohibit “private cryptocurrencies” but also recognised the potential of blockchain technology and CBDCs. The Bill never advanced to debate, partly due to industry opposition and partly because an outright ban was technologically unenforceable.
This indecision left India’s crypto landscape in limbo - not outlawed, not recognised, yet under fiscal scrutiny.
The Budget 2022 announced a radical policy change. Without providing statutory recognition, the government announced an elaborate taxation framework for Virtual Digital Assets (VDAs).
Key provisions included:
Section 115BBH: A 30% flat taxation on VDA gains.
Section 194S: 1% TDS on transfers above ₹50,000 annually.
Section 2(47A): VDAs meaning including cryptocurrencies, NFTs and other digital assets.
This framework created a fiscal paradox, as the state taxed what it did not recognise. The move implicitly acknowledged the economic existence of VDAs while denying them legal legitimacy and regulatory protection.
The charging of unrecognised assets is contrary to the rule of legitimacy and equity. Taxation law assumes the existence of a legally recognisable asset or activity before taxation is imposed. In this case, citizens are forced to pay taxes on assets that lack statutory recognition or enforceable entitlements. The resulting asymmetry obligation without protection undermines the principle of natural justice. The Constitution’s guarantee of the right to trade under Article 19(1)(g) and the requirement of rational state action under Article 14 stand diluted when the State profits from an activity it refuses to regulate.
1. Regulatory vacuum and compliance uncertainty
The absence of a governing statute or regulator has created serious compliance dilemmas.
Valuation ambiguity: No official mechanism exists to value volatile assets for taxation.
Tracking difficulties: Peer-to-peer and cross-border transfers evade effective monitoring.
Enforcement gaps: Tax authorities lack tools to verify or audit decentralised transactions.
It exposes both investors and the exchequer to risk, creating grey markets and limiting regulation. Placing taxation without affording a lawful trading environment is indirect regulation through fiscal coercion.
2. Violation of natural justice and economic freedoms
Taxation without protection violates the doctrine of fairness in administrative law. Citizens are forced to fulfil fiscal obligations for assets for which there is no legal recourse. The Supreme Court's reasoning in IAMAI that restrictions need to be proportionate and evidence-based applies with equal force here. Imposing taxes without providing for a legal trading space is indirect regulation by financial compulsion.
3. Stifling innovation and economic migration
A 30% tax without loss set-off mechanisms discouraged investment and innovation. Blockchain businesses are susceptible to capital flight and coders now move to jurisdictions with clear laws. Indian fintech's momentum is being lost to policy indecisiveness and excessive taxation.
4. Administrative complexity and investor vulnerability
Taxing unregulated assets introduces enforcement chaos.
Regulatory burden: Retail investors lack clear reporting requirements.
No consumer protection: There is no judicial redress in case of exchange failure or fraud.
Market manipulation: Lack of oversight fosters speculation and opacity.
So we have the current regime both failing to protect the consumer and failing to collect taxes effectively, the worst of both worlds.
Take Finance Minister Sitharaman's 2025 statement at the Kautilya Economic Conclave that "nations need to be ready to cope with stablecoins" or “risk falling behind constitutes a potential policy reversal.” She is acknowledging the inevitability of digital currency in such a manner that suggests that the days of an Indian fiscal dilemma may be numbered.
It could be the stimulus for much-sought legislation to balance risk and innovation with financial soundness in translating ambiguity into clarity.
1. Legislative clarity and classification
India requires comprehensive crypto legislation with precise definitions, regulatory guidance and investor protection. A type-specific approach - distinguishing between payment tokens, utility tokens and securities tokens - would be in keeping with constitutional principles of certainty and fairness.
2. Rational and proportionate taxation
The flat 30% tax rate must be rationalised. Allowing loss set-offs, defining valuation methods and aligning with capital gains norms would encourage voluntary compliance and curb evasion. Taxation should follow recognition, not precede it.
3. Innovation-friendly oversight
Regulatory sandboxes and risk-based licensing under authorities such as SEBI or RBI can facilitate innovation while maintaining continued supervision. Fostering appropriate blockchain uses and preventing abuse is essential for India's fintech leadership.
4. Inter-agency coordination
Effective cryptocurrency governance requires cooperation between the Finance Ministry, RBI, SEBI and enforcement agencies. Fragmented authority breeds inconsistency; coordinated regulation ensures both consumer protection and economic efficiency.
India's crypto experience is just a manifestation of the broader conflict between innovation and institutional drag. The state's choice to tax without valuing digital assets creates a jurisprudential anomaly, a regime in which fiscal exaction precedes judicial validation.
The digital economy in India is at a crossroads: either embrace cryptocurrencies with coherent regulation or risk becoming obsolete due to inadequate regulation. A clear framework that provides financial stability, protection for investors and innovation, is essential.
The crypto paradox is not just financial; it's constitutional. Its resolution depends on whether the government's rule in India can match the technological revolution and whether the law becomes a tool of reason in the era of digital technologies.
Vedant Dhakad and Anubha Shukla are fifth-year and second-year students respectively at Gujarat National Law University, Gandhinagar.