Taxation Laws Applicable on Cryptocurrencies in India

Introduction

Cryptocurrencies, classified as Virtual Digital Assets (VDAs) in India, have gained significant traction as an investment and trading asset class. Despite their decentralized nature and lack of recognition as legal tender, the Indian government has introduced a robust taxation framework to regulate and tax transactions involving cryptocurrencies. This article provides a comprehensive overview of the taxation laws applicable to cryptocurrencies in India as of 2025, detailing key legal provisions, tax rates, compliance requirements, and practical implications for investors and traders.

Legal Framework for Cryptocurrency Taxation

The taxation of cryptocurrencies in India is primarily governed by the Income Tax Act, 1961, as amended by the Finance Act, 2022. The introduction of specific provisions in 2022 marked a significant shift, bringing clarity to the tax treatment of cryptocurrencies and other VDAs, such as Non-Fungible Tokens (NFTs). Below are the key legal provisions:

1. Definition of Virtual Digital Assets (Section 2(47A))

The Finance Act, 2022 introduced Section 2(47A) to define VDAs. A VDA is defined as:

• Any information, code, number, or token (not being Indian or foreign currency) generated through cryptographic means or otherwise, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value.

• This includes cryptocurrencies (e.g., Bitcoin, Ethereum), NFTs, and other tokens that rely on cryptographically secured distributed ledger technology (e.g., blockchain).

The Budget 2025 expanded this definition to include any crypto-asset utilizing blockchain or similar technologies, ensuring a broader scope for taxation.

2. Taxation of Income from VDAs (Section 115BBH)

Section 115BBH, introduced by the Finance Act, 2022, governs the taxation of income arising from the transfer of VDAs. Key features include:

• Flat 30% Tax Rate: Income from the transfer of VDAs (e.g., selling, swapping, or spending cryptocurrencies) is taxed at a flat rate of 30%, plus applicable surcharge and a 4% health and education cess. This applies irrespective of whether the gains are short-term or long-term.

• No Deductions Allowed: Only the cost of acquisition (purchase price) is deductible when calculating taxable income. Other expenses, such as transaction fees, exchange fees, or mining-related costs (e.g., electricity, hardware), are not allowed as deductions.

• No Loss Set-Off or Carry Forward: Losses from VDA transactions cannot be set off against gains from other VDAs or any other income (e.g., salary, business profits, or capital gains from other assets). Additionally, such losses cannot be carried forward to future assessment years.

• Taxable Events: The term “transfer” under Section 2(47) includes:

  • Sale of cryptocurrency for fiat currency (e.g., INR).

  • Exchange of one cryptocurrency for another (e.g., Bitcoin for Ethereum).

  • Spending cryptocurrencies to purchase goods or services.

  • Relinquishment or extinguishment of rights in a VDA.

  • Compulsory acquisition of VDAs under statutory authority.

Example: If an investor buys Bitcoin for ₹1,00,000 and sells it for ₹1,50,000, the taxable income is ₹50,000 (₹1,50,000 – ₹1,00,000). The tax liability is ₹15,000 (30% of ₹50,000), plus applicable surcharge and 4% cess. No other deductions (e.g., exchange fees) are allowed, and if the investor incurs a loss in another VDA transaction, it cannot offset this gain.

3. Tax Deducted at Source (TDS) on VDA Transactions (Section 194S)

Section 194S, effective from July 1, 2022, mandates a 1% TDS on the transfer of VDAs to ensure transparency and track transactions. Key aspects include:

• Applicability: The buyer (or the exchange facilitating the transaction) must deduct 1% TDS on the sale consideration for VDA transfers exceeding a specified threshold.

• Threshold Limits:

  • For individuals or Hindu Undivided Families (HUFs) not liable for tax audit: ₹50,000 per financial year.

  • For others (e.g., traders, businesses): ₹10,000 per financial year.

• Scope:

  • TDS applies to the entire sale value, not just the profit, regardless of whether a profit or loss is made.

  • Applies to transactions involving INR or crypto-to-crypto trades (both buyer and seller deduct 1% TDS in crypto-to-crypto transactions).

  • For transactions on Indian exchanges, the exchange typically deducts and deposits the TDS. For peer-to-peer (P2P) or international exchange transactions, the buyer is responsible for deducting and depositing TDS.

• Exemptions:

  • No TDS is required if the transaction value does not exceed the threshold (₹50,000 or ₹10,000, as applicable).

  • TDS under Section 194S takes precedence over Section 194-O (e-commerce operators) for VDA transactions.

• Filing Requirement: TDS deducted must be reported via Form 26QE within 30 days from the end of the month in which the transaction occurs. Non-compliance may lead to penalties under Sections 271C and 276B.

Example: If an individual sells Ethereum worth ₹5,00,000 on an Indian exchange, the exchange deducts ₹5,000 (1% of ₹5,00,000) as TDS. The seller receives ₹4,95,000, and the TDS is reflected in their Form 26AS or Annual Information Statement (AIS) for ITR filing.

4. Taxation of Other Crypto-Related Activities

In addition to transfers, other crypto-related activities are subject to taxation:

• Airdrops: Airdrops (free distribution of tokens) are taxed at 30% based on the fair market value (FMV) on the date of receipt, as per Rule 11UA. They are classified as Income from Other Sources under Section 56(2)(ix).

• Mining: Income from mining is treated as business income under Section 28 and taxed at the FMV of the cryptocurrency at the time of mining. No deductions for mining expenses (e.g., electricity, hardware) are allowed. When mined cryptocurrencies are sold, the capital gains tax (30%) applies, with the cost basis considered zero.

• Staking: Staking rewards are taxed as Income from Other Sources at the individual’s slab rate based on the FMV at the time of receipt. If sold later, the 30% capital gains tax applies on the profit.

• Gifts: Gifts of VDAs from non-relatives exceeding ₹50,000 in value are taxed as Income from Other Sources in the recipient’s hands. Gifts from close relatives are exempt.

• DeFi Activities: Income from decentralized finance (DeFi) activities, such as yield farming or liquidity provision, is taxed as capital gains (30%) if the earned crypto is sold, or as Income from Other Sources at slab rates if held.

• Consultancy Income: If earned in cryptocurrency, consultancy fees are taxed as Income from Other Sources at the individual’s slab rate.

5. Reporting Requirements (Schedule VDA)

The Income Tax Return (ITR) forms for the financial year 2024-25 (assessment year 2025-26) include a dedicated Schedule VDA for reporting gains or income from VDAs. Key points:

• Applicable Forms: Investors must use ITR-2 (for capital gains) or ITR-3 (for business income). ITR-1 is not applicable as it lacks the Schedule VDA.

• Details Required: The schedule requires details such as:

  • Date of acquisition and transfer.

  • Cost of acquisition.

  • Consideration received.

  • Quarterly breakup of VDA income (under Schedule CG, Table F).

• Penalties for Non-Compliance: Misreporting or under-reporting VDA income can lead to penalties up to 200% of the tax evaded or imprisonment up to 7 years.

6. Tax Audit Requirements (Section 44AB)

Cryptocurrency traders with high transaction volumes or frequent trading may be classified as running a business, triggering tax audit requirements under Section 44AB if:

• Total sales exceed ₹1 crore for businesses or ₹50 lakh for professionals in the preceding financial year.

• This requires maintaining detailed books of accounts and undergoing a tax audit.

7. Pre-2022 Transactions

For transactions before April 1, 2022, the Income Tax Appellate Tribunal (ITAT) has ruled that cryptocurrency profits are treated as capital gains under Section 45, aligning them with other capital assets like stocks or property. The tax rate depends on the holding period:

• Long-term capital gains (holding period > 36 months): Taxed at 20% with indexation benefits (pre-2022).

• Short-term capital gains: Taxed at the individual’s slab rate.

Post-2022, the 30% flat rate under Section 115BBH applies uniformly, eliminating distinctions between short-term and long-term gains.

Compliance and Best Practices

To ensure compliance with India’s cryptocurrency taxation laws:

• Maintain Detailed Records: Keep records of all transactions, including token names, quantities, dates, values, and wallet addresses.

• Use Reputable Exchanges: Trade on Indian exchanges compliant with Know Your Customer (KYC) and tax reporting norms to ensure automatic TDS deduction and accurate reporting.

• Avoid P2P and International Platforms Without Documentation: Such transactions may require manual TDS deduction and increase compliance risks.

• Consult Tax Professionals: Given the complexity of VDA taxation, seek advice from qualified tax experts to optimize tax strategies and ensure compliance.

• File ITR Timely: File ITR by July 31 for the previous financial year (unless extended) to avoid penalties.

Anti-Money Laundering (AML) and KYC Compliance

Crypto platforms in India must comply with Anti-Money Laundering (AML) and KYC regulations under the Prevention of Money Laundering Act, 2002. Exchanges are required to report suspicious transactions to the Financial Intelligence Unit (FIU), enhancing transparency and reducing the risk of illicit activities.

Recent Developments (Budget 2025)

The Union Budget 2025 introduced the following updates:

• Expanded the definition of VDAs to include all crypto-assets using blockchain or similar technologies.

• Included VDAs under Section 158B as “undisclosed income,” increasing scrutiny and penalties for non-disclosure (up to 70% tax penalties).

• No changes to the 30% tax rate or 1% TDS provisions, maintaining the existing framework.

Challenges and Considerations

• High Tax Rate: The 30% tax rate, coupled with no loss set-off, is perceived as burdensome by investors, potentially discouraging crypto trading.

• Complexity in DeFi: The decentralized nature of DeFi platforms makes tax enforcement challenging, as TDS mechanisms are harder to implement.

• Regulatory Uncertainty: While taxation is clear, the broader regulatory framework for cryptocurrencies remains under development, with the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 still pending.

• Fair Market Valuation: The absence of a prescribed valuation method for FMV under the Income Tax Act creates ambiguity, particularly for airdrops and mining income.

Conclusion

The taxation of cryptocurrencies in India under Section 115BBH and Section 194S reflects the government’s cautious yet proactive approach to regulating VDAs. With a flat 30% tax on gains, 1% TDS on transactions, and strict reporting requirements, investors and traders must navigate a complex compliance landscape. Maintaining meticulous records, using compliant exchanges, and consulting tax professionals are critical to avoiding penalties and optimizing tax liabilities. As the regulatory framework evolves, staying informed about updates, such as those introduced in Budget 2025, is essential for responsible participation in India’s crypto ecosystem.