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.
Moreover, the 1% TDS doesn’t apply. In addition, traders can use presumptive taxation rules under Section 44AD: those with turnover below ₹3 crore can declare 6% of turnover as taxable income, the same concession extended to F&O traders.
How big the shift is remains unclear: exchanges declined to share figures, and the data isn’t public.
The carve-out doesn’t extend to futures margined in stablecoins.
“When you use USDT as margin, it is first purchased with INR. If that USDT is later sold at a price higher than what you paid for it, the gain is treated as income from transfer of a virtual digital asset (VDA) and taxed at 30%,” said Purushottam Anand, an advocate and founder of Crypto Legal.
A grey zone
The favourable treatment of rupee-margined futures rests on interpretation. Experts are split on whether such trades should be considered speculative. Section 43(5) of the Income Tax Act says only F&O contracts executed on recognised stock exchanges count as non-speculative. By that logic, crypto futures—traded on unregulated platforms—should fall under speculative income.
Others disagree.
Section 43(5) is specific to commodities and securities derivatives, and cryptocurrencies, being neither, fall outside the scope of Sec 43(5), said Sonu Shah, a chartered accountant specialising in tax on VDA.
It should be noted that the IT Act doesn’t define VDAs as a commodity. But Harshal Bhuta, partner, P. R. Bhuta & Co. CAs, points out that there is sufficient judicial precedent to interpret the term commodity in its ordinary business sense under Section 43(5).
Either way, the key takeaway is that even if the activity is treated as speculative, it would still be taxed at slab rates rather than the punitive flat 30%, said Bhuta. “The only difference would be that losses would only be allowed to be set-off against speculative profits. Also, these can be carried forward for up to four years to be adjusted against future speculative profits.”
The lure and the risks
Lower taxes have added to the appeal of crypto derivatives among younger investors already drawn to their high-risk, high-reward nature. However, it carries much higher risk as futures contracts magnify both gains and losses, thanks to the leverage they offer.
One Indian exchange markets leverage of up to 75x. This means with just ₹10,000 capital, a trader can open a position worth ₹7.5 lakh. A 1% uptick in prices will translate into a 75% gain, but a 1.3% drop will wipe out the entire stake.
The bigger risk is that there is no cap on losses. In the above example, if the markets fall sharply and the price slips 5%, trader would be sitting at a loss of ₹37,500. Unlike a spot trade where the maximum loss one bears is the total money invested, here, not only is the ₹10,000 capital lost, but an additional ₹27,500 needs to be shelled out to cover the loss.
“While margin funding can generate multifold returns, it equally magnifies risk to the same extent, potentially triggering rapid sell-offs and significant losses if the trade moves against your position,” said Abhishek Kumar, an investment adviser registered with the Securities and Exchange Board of India and founder of SahajMoney.
For retail investors who don’t fully understand F&O dynamics, the risks can quickly outweigh the tax benefits.
Why it may not last
The loophole itself rests on shaky ground. The government can at any time choose to close the loophole and mandate such futures to be taxed same as spot crypto trades. “The only change needed is to include crypto derivatives in the definition of VDAs, laid out in Sec 2(47A) of the IT Act,” said Bhuta.
If that happens, the arbitrage disappears, leaving traders who piled in chasing lower taxes exposed to losses with no offset.
