Tax arbitrage is driving most of Indian crypto trading away from spot markets to derivatives or futures, according to crypto exchanges and industry experts.
Derivatives now dominate the market, accounting for 80 percent or more of total trading volumes on domestic exchanges.
Under the tax regime introduced in the Budget 2022, spot trading is subject to a 1 per cent tax deducted at source (TDS), tying up active traders’ working capital. Crypto futures escape the levy, driving the surge in volume in this segment.
Internal data from local platforms, provided on the condition of anonymity, suggest that around 70 to 80 per cent of participants in the derivatives space are incurring losses.
This shift comes as daily transaction values on domestic exchanges are estimated to have surged to nearly $5 billion.
These losses mirror the retail-led downturns seen in the equity derivatives sector. Individual investors spearhead roughly 70 percent of all crypto futures activity, bearing the brunt of these market setbacks.
The phenomenon is not localised. American retail participants have faced a staggering $2.3 billion in cumulative deficits in crypto futures.
Regulatory grey area
Cryptocurrency does not fall under any regulatory body yet, as it is not defined as a currency, a commodity, or a security.
Neither the Securities and Exchange Board of India or the Reserve Bank of India regulate crypto trading.
In view of losses suffered by retail traders, SEBI has imposed a few restrictions on equity derivatives.
“There is a case for a calibrated regulatory framework for crypto futures, particularly given their leveraged nature and the potential risks for retail participants,” an tax expert said.
Unlike equity derivatives, which are linked to underlying listed companies and established market infrastructure, crypto futures are based on digital assets that are inherently more volatile.
“A well-considered regulatory approach could help strengthen investor protection while supporting responsible market development,” Ladha said. As participation increases, a regulatory framework could provide greater market confidence and safeguard investors without stifling innovation, he added.
Leverage exceeds the equity norm
Some smaller exchanges often allow 100 times leverage on crypto futures. According to crypto exchange Giottus, a typical futures trader, on average, does more than 50 trades in a month.
Under SEBI regulations, traders are allowed to use up to five times the leverage on equity derivatives. The rules do not apply to crypto derivatives as the exchanges are not regulated.
Many tax professionals interpret crypto futures profits as speculative business income, which permits loss set-offs. This tax relief is strictly prohibited under the flat 30 percent Virtual Digital Asset (VDA) tax rate, making derivatives significantly more attractive than crypto spot trading.
‘Not speculative’
While derivatives continue to account for the largest share of crypto trading, exchanges say tokenised real-world assets (RWAs) are driving recent volumes. These inflows are less concerning than broader industry estimates suggest, they claim.
“Tokenised real world assets now contribute nearly 15 percent of our total trading volume across spot and futures, and we expect that share to reach about 20-25 percent over the next few quarters,” another tax expert said.
He added that the global trend has generated tokenised RWAs exceeding $25 billion this year.
“As more traditional assets move on-chain, investors are no longer constrained by market hours, geography, or high minimum investment requirements,” Gupta said, adding that the steady expansion in trading activity beyond native crypto assets is making traditional financial markets more accessible, liquid, and efficient.
Foreign exchanges dominant
While CoinDCX, Giottus and other Indian exchanges are popular, around three-fourths of crypto trading in the country happens through foreign exchanges such as Binance and Bybit to bypass local taxes.
According to Ministry of Finance data disclosed to the Rajya Sabha in December 2025, the declared domestic VDA transaction value was Rs 51,180 crore for FY2024-25, yielding Rs 511.83 crore in TDS.
However, these official metrics only capture compliant domestic spot trading; the far larger derivatives market and massive offshore volumes remain entirely unreflected in government tax receipts.
