Govt plans to tax cryptocurrency transactions in budget 2026-27; how will they do it?

ISLAMABAD: The federal government has planned to impose a capital gains tax (CGT) on cryptocurrency transactions as part of the Budget 2026-27, according to informed sources.

Pakistan, after consultation with the International Monetary Fund, has finalized a plan to expand the scope of Section 37 of the Income Tax Ordinance, 2001, to bring gains earned from cryptocurrency trading within the tax net. The proposed tax rate is expected to range between 20% and 30%, although a final decision has yet to be announced on Friday. Sources said a high-level government committee has recommendations covering both taxation and documentation of cryptocurrency transactions, including mechanisms to identify and regulate unregistered market participants.

The move is aimed at developing a comprehensive framework for taxing digital assets while ensuring that investment flows are not excessively diverted from traditional sectors of the economy into cryptocurrencies.

Taxation of capital gains from virtual currency trading is considered the most straightforward aspect of the proposed framework, as such transactions are broadly comparable to securities trading. The initiative comes amid growing calls for regulation of Pakistan's rapidly expanding digital asset market.

According to a report submitted by the Federal Tax Ombudsman (FTO) to the Federal Board of Revenue (FBR), there are approximately 560 million cryptocurrency users worldwide, including an estimated nine million users in Pakistan. The report noted that Pakistan ranks among the world's leading countries in cryptocurrency adoption.

The FTO observed that substantial cryptocurrency-related commercial activity is currently taking place outside the country's tax framework, resulting in significant undocumented and untaxed transactions. The report criticized the absence of a regulatory and taxation mechanism for digital assets despite the sector's rapid growth.

"It is imperative that income, profits, and assets generated through cryptocurrency dealings are brought within a documented and taxable framework," the report stated, adding that a well-structured regime could help broaden the tax base and generate additional revenue for the government.”

But why has it not been done already?

Why is it hard to tax crypto?

Crypto was never designed to be easy to tax. By its very nature, cryptocurrency was meant to be decentralised. Born out of the wreckage of the 2008 financial crisis, one of the foundational goals behind the creation of this non-fiat currency in 2009 was to build a system insulated from the kind of institutional failures and centralised mismanagement that had brought the global economy to its knees. The idea was simple but radical: remove the middleman, remove the single point of failure.

However, over time, the sheer volume of capital flowing into crypto made it impossible for governments to continue overlooking it. Some countries embraced it with open arms, while others regarded it with heavy scepticism.

Pakistan, for example, a country that was until recently on the FATF grey list and has repeatedly faced difficulties with counter-terror financing checks, took a hardline stance on crypto in 2018. The first instinct was caution. The State Bank of Pakistan moved against banks facilitating virtual currency activity, a position that effectively pushed formal finance away from crypto users. During this period, the status of crypto trading, and of those who engaged in it, remained perpetually in the grey.

Traders repeatedly reported account freezes by the FIA's “National Cyber Crime Investigation Agency” (NCCIA), while the government continued maintaining that crypto itself was not illegal, but that the business of crypto had not yet been legalised.

Finally, in April 2026, that position began to shift when the central bank permitted banks to open accounts for licensed Virtual Asset Service Providers, following the enactment of the Virtual Assets Act, 2026. Under the new framework, banks are required to verify licences issued by the Pakistan Virtual Assets Regulatory Authority and maintain segregated client accounts in rupees, while remaining responsible for due diligence, risk profiling, and reporting suspicious transactions.

To many, especially those lauding the steps taken by Bilal Bin Saqib, this sounded like the beginning of a regulatory shift, but the problem with regulating crypto was never its lack of access to banks.

The problem is much deeper and Pakistan, in its effort to raise additional revenue, seems to have entered this ring underprepared. Pakistan no longer seems to be asking whether crypto exists. It is asking how to bring it into a documented system without creating high risks for banks, brokers, exchange companies and money transfer operators. Hence, the capital gains tax proposal.

But the tax proposal is the easiest part of that system to explain. Under the existing Income Tax Ordinance, Section 37 taxes gains arising from the disposal of a capital asset, other than gains exempt under the Ordinance. Section 37A separately deals with capital gains on the disposal of securities.

The government’s reported plan is to expand this framework so that crypto assets are treated in a way closer to securities or specified financial instruments: if someone buys a token for Rs1 million and later sells it for Rs1.5 million, the Rs500,000 gain would be taxable.

Tax experts privy to these developments suggest that amendments to the Income Tax Ordinance, 2001, should formally classify crypto assets as specified financial instruments and establish clear rules for calculating taxable gains and losses, similar to those applicable to listed securities.

Under proposals being discussed, gains on cryptocurrency disposals would be taxed on a realised basis using the First-In, First-Out (FIFO) valuation method. Tax rates could also vary according to the holding period of assets, encouraging long-term investment while discouraging speculative trading.

This is, in effect, the stock market method. But in the stock market, the trail is relatively clean. There is a broker, a central clearing company, a bank account, a transaction date, a tax identification number, and a settlement mechanism.

In crypto, the gain can be realised without looking like it ever did. A trader can buy bitcoin, convert it into USDT, use that USDT to buy another token, move the token to a self-custody wallet, and later sell it through an offshore platform. No rupees may enter a Pakistani bank account at the point where the economic gain is made. Yet, economically, the trader may have moved from one asset into another and locked in a gain, multiple times over. The fact that all of this information is on a publicly accessible blockchain does not entirely help when the same thing is done thousands of times over.

This is where the problem of realisation becomes difficult. A tax authority can write that disposal includes sale, exchange or transfer. It can adopt First-In, First-Out valuation, as the proposals being discussed reportedly contemplate. It can also say the rupee value of the asset at the time of disposal must be used to calculate gain or loss. But enforcement depends on data: who bought, at what price, from which account, on which exchange, through which wallet, and at what exchange rate. Without that information, enforcement can quickly turn into a nightmare.

And then comes P2P trading, which makes this even more slippery. In a P2P transaction, a platform matches two users directly with each other. The buyer pays the seller in rupees through a conventional bank transfer, and in return, the platform releases the crypto from escrow to the buyer's wallet. On the surface, the bank sees nothing more than a routine transfer between two individuals. The exchange sees only a release of crypto from escrow.

The tax authority, sitting outside both of these systems simultaneously, may see neither the cost base nor the realised gain. There is no invoice, no broker confirmation, no settlement note, and no declared transaction value. If users further split their trades across multiple platforms, route payments through foreign accounts, or park value inside stablecoins to avoid visible conversion events, the visibility problem compounds with each additional step. The architecture of P2P is, by design, bilateral and opaque, which makes it structurally resistant to the kind of third-party reporting that tax enforcement typically relies on.

This P2P risk becomes even more sensitive when it comes to undeclared offshore crypto holdings. Most Pakistani investors opened cryptocurrency accounts using foreign addresses or offshore platforms due to the absence of a domestic legal framework in previous years.

Imposing taxes without offering a transitional compliance mechanism would mean encouraging asset concealment, capital flight and foreign exchange outflows, or permanent loss of potential tax revenues. As a result, policymakers face the challenge of ensuring compliance while providing a practical pathway for regularisation of previously undeclared assets. For a country trying to preserve foreign exchange reserves and manage pressure on the rupee, this could create another policy headache.

This is why FATF keeps returning to virtual assets. In its 2025 targeted update, FATF said virtual assets are inherently borderless and that regulatory failures in one jurisdiction can have global consequences. It also warned that “jurisdictions still face difficulty identifying natural or legal persons conducting virtual asset service activity, and that offshore Virtual Asset Service Providers (VASP) remain a challenge.” FATF also flagged the increasing use of stablecoins by illicit actors, including terrorist financiers, drug traffickers and North Korean actors, and noted industry estimates of around $51 billion in illicit on-chain activity linked to fraud and scams in 2024.

The government of Pakistan’s next few steps:

According to a report submitted by the Federal Tax Ombudsman (FTO) to the Federal Board of Revenue (FBR), there are approximately 560 million cryptocurrency users worldwide, including an estimated nine million users in Pakistan. The report noted that Pakistan ranks among the world's leading countries in cryptocurrency adoption.

While the State Bank of Pakistan (SBP) issued a circular in April 2018 warning financial institutions about the risks associated with virtual currencies, it did not explicitly declare cryptocurrencies illegal.

The FTO observed that substantial cryptocurrency-related commercial activity is currently taking place outside the country's tax framework, resulting in significant undocumented and untaxed transactions. The report criticised the absence of a regulatory and taxation mechanism for digital assets despite the sector's rapid growth.

"It is imperative that income, profits, and assets generated through cryptocurrency dealings are brought within a documented and taxable framework," the report stated, adding that a well-structured regime could help broaden the tax base and generate additional revenue for the government.

The tax policy unit of the Ministry of Finance has confirmed that the issue remains under consideration and is being examined in consultation with industry experts and other stakeholders. Experts believe that while the legalisation and regulation of digital assets are necessary, designing an effective tax framework presents significant challenges.

Policymakers must strike a balance between generating tax revenues and avoiding measures that could discourage innovation or trigger capital flight.

The taxation of cryptocurrency mining, staking rewards, yield farming, decentralised finance (DeFi) activities, non-fungible tokens (NFTs), and token issuance mechanisms such as Initial Coin Offerings (ICOs) and Initial Exchange Offerings (IEOs) presents additional complexities. Many of these activities involve non-fiat assets and transactions that do not pass through conventional banking channels.

Tax experts suggest that amendments to the Income Tax Ordinance, 2001, should formally classify crypto assets as specified financial instruments and establish clear rules for calculating taxable gains and losses, similar to those applicable to listed securities.

Under proposals being discussed, gains on cryptocurrency disposals would be taxed on a realised basis using the First-In, First-Out (FIFO) valuation method. Tax rates could also vary according to the holding period of assets, encouraging long-term investment while discouraging speculative trading.

In short, the state is looking to tame cryptocurrency, a wild beast that has not been tamed by even the most sophisticated financial markets to the fullest. Quite a few questions emerge, but at the top is: who will do the reporting? In a lot of countries, regulation relies on self-reporting by traders who realise the money in their home currency. But what if they do not? Will the VASPs report?

If only licensed Pakistani VASPs are required to report, much of the market may remain invisible because users can continue to trade offshore through other exchanges. If banks are required to flag suspicious P2P flows, the system will need rules that distinguish genuine personal transfers from crypto settlement. If FBR relies only on self-declaration, the tax misses the most evasive users. And if Pakistan tries to block offshore exchanges without a credible domestic alternative, trading may migrate entirely into informal channels that are harder to supervise.

That is the paradox of crypto regulation. A ban does not make the market disappear. Over-regulation can make it more hidden. Under-regulation can turn it into a tax and AML blind spot. The state must build enough formal infrastructure to make compliance easier than evasion. But as of now, we have not even been able to do that with our own fiat currency.

The proposed capital gains tax is therefore not merely a budget measure. It is a test of whether Pakistan can regulate a financial asset that was designed to move faster than the state. If the law is clear, the reporting channels are practical, and regularisation is handled sensibly, the government may bring a large undocumented market into the tax net. It may also give banks and licensed exchanges a pathway to build a formal digital asset industry under AML and CFT supervision.