Many crypto traders use futures to skirt 30% tax—but risks remain

Some experts say govt may classify crypto derivatives as VDAs, ending the tax arbitrage and imposing 30% levy

- Shipra Singh

When India imposed a flat 30% tax on cryptocurrency profits in 2022, along with a 1% tax deducted at source (TDS) on the full sale value of trades, it pushed many retail investors out of the market. The levy, coupled with rules that prevented losses from being offset against gains, left traders facing steep bills even when their portfolios were in the red. But a workaround has emerged. A growing number of traders are turning to cryptocurrency futures, which aren't taxed like spot trades, allow losses to be offset, and avoid the 1% TDS—making them an attractive, if risky, alternative.

Why futures are different

Crypto futures function like standard futures contracts: derivative bets on the price of tokens such as Bitcoin or Ether. Most major domestic exchanges, including CoinDCX, Mudrex, Pi42 and Zebpay, now offer them, margined either in rupees or in USDT, a stablecoin pegged to the dollar. Here's where the tax distinction comes in. Rupee-margined crypto futures don't involve an actual purchase or sale of tokens. As a result, they can be treated like other futures-and-options (F&O) trades and taxed as business income at slab rates, rather than the punitive 30% applied to spot trades.

The difference can be dramatic as losses are deductible. In spot trading, a trader who makes a ₹5 lakh profit on one deal and loses ₹3 lakh on another still pays 30% on the ₹5 lakh gain—₹1.5 lakh in taxes—while the loss is ignored. Under business income treatment, the net income would be ₹2 lakh and the tax just ₹60,000. For traders in lower tax brackets, the bill could be even smaller.