Nithin Kamath Points Out Risks in India’s Developing Crypto Market Future

The Indian crypto market is in the middle of a rapid shift from spot trading to futures options (F&O), raising concerns of extreme leverage and tax arbitrage among the experts. Zerodha co-founder Nithin Kamath emphasised this issue in a recent LinkedIn post, saying, “I hadn't realised how popular crypto F&O has become,” pointing out that trading in derivatives has become more appealing than regulated spot transactions due to a combination of high leverage and advantageous tax treatment.

Tax Loopholes And High Leverage Push Futures Trading Beyond Spot Market

Indian crypto exchanges are now observing futures volumes that go past spot trades, as traders rely on derivatives to maximise returns. Futures transactions remain in a grey zone in contrast to spot deals, which come under India's virtual digital asset (VDA) taxation framework and are subject to a flat 30 percent tax and a 1 percent tax deducted at source (TDS). Indian rupees can be used by traders to show margins and, through global exchanges, can be converted into stablecoins like USDT. This means that Section 1945 of the Income Tax Act does not apply, since no direct transfer of VDAs occurs.

In a report by The Economic Times, Purushottam Anand, founder of Crypto Legal, said that this allows future traders to sidestep the flat 30 percent levy. Instead, gains are often reported as “income from other sources” and are subject to the tax income slabs. This creates an opportunity for traders to lower their tax burdens as they can show profits through low-income family members.

The opportunity available in crypto futures increases both risks and rewards. While the crypto futures can allow leverage to exceed 50x, or with some global exchanges, even 100x, the Indian stock market can only allow leverage of 3x to 5x. This means traders can control positions with higher profits and low margins, but simultaneously, this exposure can result in massive losses as well.

In India, crypto futures remain unregulated despite showing signs of explosive growth. Transparency concerns are raised, but exchanges are not obligated to disclose trading data. A potential step to pave the way for tighter oversight can be done, as the Central Board of Direct Taxes (CBDT) has started probing the sector to regulate how derivatives should be treated under the VDA guidelines.

For the foreseeable future, crypto futures continue to operate under the radar, providing profitable tax benefits but leaving Indian traders exposed to financial risks.