In the updated Anti-Money Laundering and Countering the Financing of Terrorism (AML and CFT) Guidelines for crypto exchanges issued on 8 January, India’s Financial Intelligence Unit (FIU-IND) ordered registered crypto exchanges to immediately halt deposits, withdrawals, and trading of privacy coins.
Privacy tokens, such as Zcash and Dash, use cryptographic techniques to obscure wallet addresses and transaction histories. Regulators globally view these as high risk as they make tracing of transactions difficult, complicating compliance with know your customer (KYC), AML and CFT norms.
Exchanges begin delisting
Crypto exchanges are now translating the FIU-IND’s risk-based guidance into concrete platform-level actions.
Among these is Mudrex, which has delisted privacy-focused tokens from 30 January. It will discontinue spot trading support for Zcash (ZEC), Dash (DASH) and PIVX (PIVX). From the effective date, users will no longer be able to place new spot trades in these tokens. Any coin-based investment products or ‘coin sets’ that include these affected assets will be automatically rebalanced to remove them.
Mudrex has informed users in advance and provided a defined window for investors to review their portfolios, sell holdings voluntarily or rebalance allocations before the delisting takes effect.
For users who continue to hold these tokens beyond the cut-off date, the exchange plans to automatically liquidate remaining balances at the prevailing market price and convert the proceeds into USDT (Tether), a dollar-pegged stablecoin. After the delisting date, users will no longer be able to sell or trade these assets on the platform.
Mudrex CEO Edul Patel says the regulatory shift should be seen less as an outright ban and more as a compliance reset, adding, “For users, it means safer markets. For platforms, it means higher compliance standards.” Other exchanges are likely to follow similar playbooks—advance notice, limited exit windows, forced conversions, and enhanced customer communication— as the industry adopts a tighter compliance perimeter.
Here are the key post-delisting scenarios investors need to watch closely from the perspective of both taxation and compliance.
Delisting or trading suspension
If a virtual digital asset (VDA) or crypto token is merely delisted or trading is suspended on an exchange, without any sale or conversion, there is no immediate tax impact. “In such a scenario, the asset would continue to remain in existence, and it would be a simple delisting or suspension of trading,” said Raghav Bajaj, Partner at Khaitan & Co. Since the investor has not transferred or parted with rights in the token, no taxable event is triggered under Indian income tax laws.
Taxation of crypto assets in India
When does tax apply?
Only when a crypto asset is transferred
- Sold for INR.
- Exchanged for another crypto.
- Forced conversion by an exchange.
Crypto is not taxed
- On mere holding.
- Transfer to private wallet.
Tax rate on crypto gains
- Flat 30% tax (irrespective of income tax slab).
- Applicable surcharge is health & education cess.
Can you adjust losses?
- Losses from crypto cannot be set off against any income.
- Losses cannot be carried forward.
- Expenses (except cost of acquisition) not allowed.
TDS on crypto transactions
- 1% TDS under Section 194S.
- Applies on sale or exchange.
Thresholds
- Rs.50,000 per year (specified individuals).
- Rs.10,000 per year (others).
Investor still holding token
Simply holding a privacy token, even after it is delisted, does not attract tax. Anand Shrivastava, Partner at Sagus Legal, notes that Section 115BBH of the Income Tax Act taxes only income arising from the transfer of VDAs. “Tax liability will only arise when the specific token is transferred, and holding such crypto shall not attract any tax liability,” he says, though such assets may face higher scrutiny due to their risk profile.
Forced conversion by exchange
Where an exchange automatically converts a delisted privacy token into another crypto asset, rupees, or stablecoins, the tax treatment changes materially. Under Indian tax laws, ‘exchange’ is included within the definition of a taxable transfer. “The exchange of one VDA for another VDA would trigger a taxable event for the investor,” says Bajaj. Any gains arising from such forced conversions are taxed at 30%, plus applicable surcharge and cess, under the special VDA tax regime. No deductions, other than the cost of acquisition, are allowed.
Inability to sell/exit at a loss
The VDA tax framework is particularly unforgiving regarding losses. Losses from the transfer of a VDA cannot be set off against any other income, nor can they be carried forward to future years. If an investor is forced to exit at a loss due to delisting or illiquidity, that loss does not provide tax relief.
Transfer to a private wallet
Moving tokens from an exchange to a private wallet does not ordinarily trigger tax. “Since the transfer from an exchange to a private wallet would not result in generation of any income, there will be no incidence for any tax liability,” Shrivastava says.
Sale on a foreign exchange
Some investors may try to liquidate privacy tokens on overseas platforms. Any gains from such sales are fully taxable in India. “Income from the transfer of a VDA shall be calculated at 30% of the gain. This also includes income from sales on a foreign crypto exchange,” explains Shrivastava. Such income must be reported under Schedule VDA in the income tax return. In addition, holdings and transactions in foreign currencies must be disclosed on Schedule FA. Buyers are also required to deduct 1% tax deducted at source (TDS) under Section 194S, subject to specified thresholds.
FEMA and LRS complications
Selling or holding privacy tokens overseas also raises foreign exchange compliance risks. Crypto transactions do not fall under the permitted purposes of the Reserve Bank of India’s Liberalised Remittance Scheme and are not explicitly exempt under FEMA regulations. Even if liquidation occurs abroad, reporting obligations continue to apply to Indian residents, and unregistered foreign platforms may expose investors and intermediaries to regulatory action.
Scrutiny windows and mistakes
Tax authorities can reopen assessments for up to three years and three months if the income involved is below Rs.50 lakh, and up to five years and three months if it exceeds this threshold. The biggest risk, experts warn, is non-disclosure. “Failing to report AECs stored on foreign exchanges under Schedule FA or omitting past VDA transactions because the token has been delisted can attract severe penalties,” Shrivastava says, including penalties under the Black Money Act.
As exchanges wind down, privacy tokens present a narrow window for investors to exit cleanly. So, document transactions carefully and ensure full disclosure. The regulatory message may be about risk mitigation, but for investors, the financial and tax-related consequences are already very real.