RBI pushes crypto prohibition as India tax gap reaches 75%

India's central bank is pushing for a crypto ban while tax authorities report that 75% of crypto traders failed to declare gains.

The Reserve Bank of India is advocating for a policy leaning toward cryptocurrency prohibition, while the nation's tax department warns that offshore platforms and peer-to-peer trading are enabling widespread evasion, according to government documents reviewed by Reuters.

"The Reserve Bank's position is that banks and financial institutions should be barred from holding, trading, or facilitating any exposure to crypto assets and privately issued stablecoins," a person familiar with the central bank's internal documents said.

Tax filings for the fiscal year ending March 2023 show that fewer than a quarter of 645,000 individuals who transacted in crypto reported those gains on their returns, the documents reveal. India imposes a 30% tax on cryptocurrency profits. The tax department flagged that foreign-based exchanges and direct rupee-denominated peer-to-peer transactions complicate ownership verification and obscure taxable earnings.

India has roughly 39 million crypto investors holding about $2.1 billion in digital assets as of May, per tax department estimates. A prohibition could push trading activity further offshore, deepening the compliance gap the tax authorities are already struggling to close. The government has not presented a comprehensive crypto bill since a 2021 draft that proposed banning private cryptocurrencies was shelved.

The RBI's opposition extends beyond bitcoin and ether to stablecoins. The central bank warned that dollar-pegged tokens could compromise monetary sovereignty, while rupee-denominated stablecoins might erode seigniorage revenue and introduce systemic vulnerabilities during market stress, the documents show.

India's regulatory vacuum has persisted since the Supreme Court struck down the RBI's 2018 banking ban on crypto in 2020. A proposed policy document has faced repeated delays, leaving the sector in legal limbo. The Ministry of Corporate Affairs is now examining accounting standards for virtual digital assets, though no timeline for legislation has been set.

The central bank's hawkish stance contrasts with moves in other major economies. The U.S. Securities and Exchange Commission is preparing to propose a crypto rule as soon as this month to ease startup fundraising, while the European Union's Markets in Crypto-Assets regulation provides a structured framework for digital asset issuers. India's reluctance partly reflects its dependence on energy imports and persistent current account deficits — authorities worry that widespread crypto adoption could accelerate capital outflows through unregulated channels, worsening the external deficit.

This article is for informational purposes only and does not constitute investment advice.