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Cryptocurrency trading volumes at key Indian exchanges are down more than 90% after the national government imposed several new taxes on crypto transactions.

On February 1, 2022, the Indian government announced new crypto tax rules, leading to industry backlash. One provision that took effect on April 1 established a 30 percent capital gains tax rate on all crypto transactions. The provision that most concerned investors, however, was a one percent tax deducted at source (TDS), which took effect on July 1.

The TDS is a tax imposed on every individual crypto transaction at a rate of one percent of the transaction amount. The tax is comparable to a proposal by Senate Democrats in the United States to establish a transaction tax on every sale of stocks, bonds, or derivatives.

The nonpartisan Tax Foundation explains that these taxes are extremely harmful because they increase transaction costs, decrease liquidity, and lead to investors making inefficient decisions to hold onto assets for longer than they would in a free market. These consequences will be felt most severely among smaller investors, for whom higher transaction costs are more difficult to absorb.

As further stated by the CEO of Indian cryptocurrency exchange WazirX in March, “The 1% TDS will kill liquidity, which means ultimately profitability goes down for everyone. It’s a lose-lose.”

New monthly signups for WazirX are down more than 60 percent among Indian users since the first new crypto tax took effect in April. Other Indian exchanges like CoinDCX and Zebpay have seen their signups drop by 67 percent and 89 percent since April, respectively.

Trading volumes show an even more dire case for the Indian cryptocurrency market. Between the implementation of the first new crypto tax provision in April and the end of August, CoinDCX, Zebpay, and WazirX saw decreases in trading volumes of 94 percent, 95 percent, and 99 percent, respectively.

In 2021, cryptocurrency markets in India were booming, with reports showing the country to be home to the largest number of crypto holders in the world. Today, the Indian government has greatly diminished the ability of this innovative industry to thrive within their borders due to over-taxation.

American policymakers should use the case study of Indian crypto markets as a cautionary tale: Transaction taxes and over-taxation of asset markets, whether in cryptocurrencies or in traditional equities, could have devastating effects to investment and to the economy as a whole.