Bitcoin was the first cryptocurrency to enter the market in 2009, created by an unknown person or group using the alias Satoshi Nakamoto. Since then, several other cryptocurrencies have emerged, with some of the most popular being Bitcoin Cash, Ripple (XRP), and Litecoin. According to estimates, over 8,000 cryptocurrencies existed as of January 2022. A recent study by Nasscom and WazirX highlights that India’s cryptocurrency market has grown rapidly in recent years. Indian investments in cryptocurrency could reach $241 million by 2030. Currently, India has the highest number of cryptocurrency owners globally.
Despite this growth, India lacks specific legislation that governs, regulates, or prohibits dealing in cryptocurrencies. Therefore, it is not illegal in India to sell, purchase, deal in, or mine cryptocurrencies or to establish a cryptocurrency exchange. Due to the high risks associated with cryptocurrency investment, there was speculation that a bill to ban or regulate cryptocurrencies might be introduced during the Winter Session of Parliament. However, this bill was not presented.
In the Union Budget 2022, the government made it clear that it does not intend to ban the use of cryptocurrencies but aims to regulate them. Several provisions have been proposed in the Income-tax Act to regulate investments in cryptocurrencies, non-fungible tokens (NFTs), and other virtual digital assets. These provisions apply from the assessment year 2023–24. As such, any transfer of virtual digital assets on or after April 1, 2022, shall be taxable under the new provisions introduced in the Finance Bill 2022.
Meaning of Virtual Digital Asset
A new clause, Section 2(47A), has been added to define the term “virtual digital asset” in the Income-tax Act. This clause includes the following:
Any information, code, number, or token (other than Indian or foreign currency) that is generated through cryptographic means or other methods, and represents a digital value exchanged with or without consideration, with the promise or representation of having intrinsic value or functioning as a store of value or unit of account. It includes assets used in financial transactions or investments and can be transferred, stored, or traded electronically.
Non-fungible tokens or similar digital tokens, by any name, are also included in the definition.
Any other digital asset that the Central Government may specify through notification in the Official Gazette is included as well.
In simple terms, virtual digital assets include cryptocurrencies, NFTs, or any other digital asset recognized by the government. This definition does not include subscriptions to over-the-top (OTT) platforms, mobile applications, or e-commerce platforms. However, the Central Government has the authority to exclude any digital asset from this definition by issuing a notification, possibly to exclude the Central Bank Digital Currency (CBDC) when launched in India.
Classification of Virtual Digital Asset
The government has not clarified whether virtual digital assets should be considered currency, a commodity, or a security. Due to this lack of clarity, virtual digital assets are currently classified as capital assets.
Under Section 2(14) of the Income-tax Act, a capital asset is defined as property of any kind held by a person, whether or not connected with their business or profession. Though the term ‘property’ is not explicitly defined in the Act, it is interpreted broadly to mean any interest a person can own, use, or benefit from.
Thus, if cryptocurrencies or NFTs are purchased as investments, they are considered capital assets, and any gain arising from their transfer will be taxed as capital gains. However, if the transactions are substantial and frequent, it may be concluded that the taxpayer is trading in these assets. In such cases, the income from the sale of virtual digital assets would be treated as business income.
Taxation under the Head Capital Gains
If gains from virtual digital assets are treated as capital gains, their classification into short-term or long-term gains depends on the holding period.
If a virtual asset is held for more than 36 months, it will be classified as a long-term capital asset. Otherwise, it will be considered a short-term capital asset.
Computation of Capital Gains
The capital gains from the sale of virtual digital assets are computed as follows:
The full value of the consideration received from the sale is reduced by the cost of acquisition. The result is the amount of capital gain, whether short-term or long-term, depending on the holding period.
Disallowance of Deductions
Under Section 115BBH(2)(a), no deduction other than the cost of acquisition is allowed when computing gains from virtual digital assets. Specifically, the following are disallowed:
Expenditure incurred in connection with the transfer of the asset
Cost of improvement of the asset
Indexation of the cost of acquisition
Exemptions under Section 54F
This means the gains must be calculated strictly as the sale price minus the purchase price, without considering any other deductions.
Flat Tax Rate on Capital Gains
According to Section 115BBH(1), income from the transfer of virtual digital assets is taxed at a flat rate of 30 percent. This applies to both short-term and long-term capital gains. No deductions under Chapter VI-A or exemptions under Section 54F are permitted. However, a rebate under Section 87A may still be available to eligible individuals.
Surcharge Rates
Surcharge on capital gains from virtual digital assets varies based on the income level and category of the taxpayer.
For individuals, Hindu Undivided Families (HUFs), Associations of Persons (AOPs), Bodies of Individuals (BOIs), or Artificial Juridical Persons (AJPs), the surcharge rates are as follows:
Long-term capital gains attract no surcharge for income up to Rs. 50 lakh, 10 percent for income between Rs. 50 lakh and Rs. 1 crore, and 15 percent beyond that, regardless of the income level.
Short-term capital gains attract no surcharge for income up to Rs. 50 lakh, 10 percent for income between Rs. 50 lakh and Rs. 1 crore, 15 percent for income between Rs. 1 crore and Rs. 2 crore, 25 percent for income between Rs. 2 crore and Rs. 5 crore, and 37 percent for income above Rs. 5 crore.
For other categories of taxpayers, such as firms, companies, local authorities, or cooperative societies, the applicable surcharge rates vary depending on the nature of the taxpayer and the amount of income. These rates range from 2 percent to 12 percent.
All taxpayers must also pay a 4 percent Health and Education Cess on the total of income tax and surcharge.
Business Income from Virtual Digital Assets
If trading in virtual digital assets is regular and substantial, the income from these transactions may be treated as business income. In such cases, the income is taxed at a flat rate of 30 percent, with applicable surcharge and cess. No deductions for expenses or allowances are allowed when calculating this income.
Other Sources of Income
Section 56(2)(x) covers taxation of income from gifts or inadequate consideration. This provision applies regardless of the assessee’s residential status or legal classification.
When a person receives virtual digital assets without any consideration and the fair market value exceeds Rs. 50,000, the entire value is taxed as income from other sources. If the asset is received at a price lower than the fair market value by more than Rs. 50,000, the difference is taxed.
This rule applies to all specified properties, which now include virtual digital assets along with shares, securities, jewellery, art, and collectibles.
Determining Fair Market Value
The fair market value of a virtual digital asset is calculated under Rule 11UA.
If purchased from a registered dealer, the invoice value is considered the fair market value.
If acquired through any other mode, such as mining, the fair market value is the price it would fetch in the open market on the valuation date. If the value exceeds Rs. 50,000, a registered valuer’s report may be used to estimate this value.
Tax Rates for Gifts
When a virtual digital asset is received as a gift or at less than fair market value, and it is taxed under Section 56(2)(x), the applicable tax rate depends on the total income of the recipient. The flat 30 percent rate under Section 115BBH does not apply in this case since the income does not arise from a transfer. However, when the recipient sells or transfers the gifted asset, the resulting gains are taxed under Section 115BBH.
Taxation of Virtual Digital Assets (VDAs) under Section 115BBH
The Finance Act, 2,022, introduced a new taxation regime for Virtual Digital Assets (VDAs), which became effective from the Assessment Year 2023–24 (i.e., Financial Year 2022–23). The key provision governing the taxation of income from VDAs is Section 115BBH of the Income Tax Act. This section outlines how income from the transfer of VDAs is taxed, the rate of tax, and restrictions on allowable deductions. Section 115BBH(1)(a) specifies that any income derived from the transfer of a VDA is taxable at a flat rate of 30%. This flat rate applies irrespective of the amount of income or the taxpayer’s regular tax slab. Importantly, this rate is applicable to all categories of taxpayers, including individuals, Hindu Undivided Families (HUFs), companies, and others.
No Deductions for Expenses or Allowances
Under Section 115BBH(2)(a), the law restricts the deductions that a taxpayer can claim against income from the transfer of a VDA. Specifically, no deduction is permitted in respect of any expenditure (other than the cost of acquisition) or allowance or set-off of any loss under any provision of the Income Tax Act. This means that the only reduction allowed from the sale proceeds of the VDA is the cost at which the asset was originally acquired. All other expenses—such as transaction fees, internet charges, advisory fees, or any other related costs—cannot be deducted to arrive at the taxable income. This is a significant departure from the general principle of taxing capital gains or business income, where such expenses are usually allowed.
No Set-off of Losses from VDAs
One of the most stringent aspects of Section 115BBH is outlined in subsection (2)(b), which provides that no set-off of loss from the transfer of a VDA is permitted against income computed under any other provision of the Act. This means that if a taxpayer incurs a loss on the sale of a VDA, they cannot offset this loss against other income, whether from salary, house property, business, or even other capital gains. Moreover, such loss is not allowed to be carried forward to subsequent years. Essentially, VDA losses are disregarded entirely for income computation, making VDA investments particularly risky from a tax perspective.
Illustration of Tax Calculation on VDA
Consider the following example. Suppose an individual purchases Bitcoin for ₹1,00,000 and sells it for ₹2,50,000. The profit or gain from the transfer is ₹1,50,000. Under Section 115BBH, this entire gain is taxed at 30%, resulting in a tax liability of ₹45,000. No deductions are permitted for any costs related to internet charges, broker commission, etc. Further, a health and education cess of 4% on the tax amount (i.e., ₹1,800) will also be levied, bringing the total tax payable to ₹46,800. Suppose in the same financial year, the individual incurs a loss of ₹80,000 on the transfer of Ethereum. This loss cannot be set off against the ₹1,50,000 gain on Bitcoin or against any other income. It is essentially ignored for tax computation purposes.
Classification of Income from VDAs
The income from VDAs can fall under different heads depending on the facts of the case. In most cases, income from the transfer of VDAs is taxable under the head “Capital Gains” if the individual is holding them as investments. However, if a person frequently trades in VDAs or is involved in mining or development of such assets, then such income may be classified under “Business Income”. Regardless of whether the income is assessed under the head “Capital Gains” or “Business Income”, the tax rate of 30% under Section 115BBH applies uniformly. It overrides the normal provisions of the Income Tax Act related to the computation of income under these heads.
TDS on Transfer of Virtual Digital Assets – Section 194S
To ensure proper reporting and tax compliance, the Finance Act, 2022 introduced Section 194S, which mandates the deduction of Tax Deducted at Source (TDS) on the payment for the transfer of VDAs. This provision came into effect from 1st July 2022. According to Section 194S, any person responsible for paying any sum by way of consideration for the transfer of a VDA is required to deduct TDS at the rate of 1% of the consideration amount. This TDS is required to be deducted at the time of credit of such sum to the account of the resident or at the time of payment, whichever is earlier. The provision applies irrespective of the mode of payment—cash, kind, or exchange of another asset.
Threshold Limits for TDS Applicability
The TDS requirement under Section 194S applies only when the total consideration paid during the financial year exceeds certain threshold limits. If the payer is a specified person—i.e., an individual or HUF whose turnover is less than ₹1 crore in case of business or ₹50 lakh in case of profession in the preceding financial year—then TDS under Section 194S is not required if the total payment does not exceed ₹50,000 during the financial year. For all other cases, the threshold limit is ₹10,000 in a financial year. If the total payment for VDAs in a financial year exceeds the respective threshold, then TDS at 1% becomes mandatory.
Responsibility of the Exchange in Peer-to-Peer Transactions
In transactions involving virtual digital asset exchanges, the law provides specific guidelines to determine who is responsible for deducting TDS. If the transaction takes place through an exchange and the exchange is not the actual payer, then the exchange may be required to deduct TDS. In peer-to-peer (P2P) transactions, where two individuals trade directly with each other without involving an exchange, the responsibility to deduct TDS lies with the buyer. This can be particularly burdensome for individual investors, who may not have the means or knowledge to handle TDS compliance. In such cases, failure to deduct TDS could result in penalties and disallowance of expenses under other provisions of the Income Tax Act.
Reporting Requirements and Form 26Q
Taxpayers who are required to deduct TDS under Section 194S must report the same in their TDS returns. The payment and reporting of TDS are to be made quarterly through Form 26Q. Additionally, the deductor must issue a TDS certificate in Form 16A to the deductee. Timely compliance with TDS provisions is critical, as non-compliance can result in interest and penalties. Also, since the income tax department receives real-time data through TDS filings, failure to comply can lead to scrutiny or notices.
Taxation of Gifts of Virtual Digital Assets
The Finance Act, 2022 also brought VDAs under the purview of taxation on gifts. As per the amended provisions of Section 56(2)(x), where a person receives a VDA without consideration or for inadequate consideration, and the value of such benefit exceeds ₹50,000, the value of the VDA will be taxed as “Income from Other Sources” in the hands of the recipient. The fair market value of the VDA on the date of receipt will be considered for computing taxable income. However, there are exceptions to this rule. Gifts received from specified relatives (such as parents, siblings, spouse, etc.) or on specified occasions (such as marriage) are not subject to tax. Nonetheless, in all other cases, receiving a VDA as a gift can lead to tax liability.
Valuation and Determination of Fair Market Value
For the purpose of determining income in cases of gifts, barter transactions, or transfers where consideration is not wholly in cash, the fair market value (FMV) of the VDA needs to be ascertained. The government may notify specific rules for the valuation of VDAs, similar to Rule 11UA which is used for the valuation of shares and securities. In the absence of specific valuation rules, the FMV can be determined based on the prevailing market rate on the exchange or platform where the VDA is listed or traded. Proper documentation and valuation support are essential, especially in case of scrutiny by tax authorities.
Audit and Books of Account
If the income from VDAs forms a substantial part of an individual’s or business’s total income, and the turnover crosses the specified limits, then the requirement to maintain books of account and get them audited under Section 44AB may apply. Especially for frequent traders or those engaged in VDA transactions as a business, these compliance requirements become relevant. Non-maintenance of proper records can lead to challenges during scrutiny assessments or when justifying the nature and value of transactions. Therefore, maintaining proper books, transaction logs, and supporting evidence such as screenshots, transaction IDs, wallet addresses, and exchange statements is strongly recommended.
Advance Tax and Self-Assessment Tax
Taxpayers earning income from VDAs are also required to consider the implications of advance tax. If the total tax liability for the year exceeds ₹10,000, the taxpayer must pay advance tax in four installments as per the applicable due dates. Failure to do so attracts interest under Sections 234B and 234C. This is particularly relevant for high-frequency traders or individuals with significant capital gains from VDAs. At the time of filing the return, if any shortfall remains, it must be paid as self-assessment tax. Accurate estimation of VDA-related income throughout the year is important to avoid interest and penalty implications.
Filing of Income Tax Return and Reporting of VDA Income
Taxpayers who have earned income from VDAs must disclose such income while filing their Income Tax Return (ITR). The Central Board of Direct Taxes (CBDT) has revised the ITR forms to include specific schedules for reporting income from VDAs. In ITR-1 and ITR-2, for example, there is a separate section to declare the nature of the VDA, date of acquisition, date of transfer, cost of acquisition, sale consideration, and tax payable. Accurate reporting in the correct fields is essential to ensure compliance and avoid mismatches with TDS records. Taxpayers must also ensure that they match their reported income with the Annual Information Statement (AIS) and Form 26AS, which reflect transactions reported by exchanges, banks, and deductors.
Penalty and Prosecution for Non-Compliance
Non-compliance with provisions relating to taxation of VDAs can attract significant consequences. If a person fails to deduct or deposit TDS as required under Section 194S, interest under Section 201(1A) and penalty under Section 271C may apply. Similarly, non-disclosure of VDA income in the ITR or incorrect reporting may lead to penalty under Section 270A (for under-reporting or misreporting of income) and even prosecution in certain cases under Section 276C. Given the increased scrutiny by the income tax department and the availability of third-party data, taxpayers must exercise diligence in ensuring full compliance with all applicable provisions.
Tax Deducted at Source (TDS) on Virtual Digital Assets
To ensure proper tracking of crypto transactions, the government introduced a new Section 194S in the Income Tax Act, which provides for the deduction of tax at source (TDS) on the transfer of a virtual digital asset. According to this section, any person responsible for paying any sum by way of consideration for the transfer of a virtual digital asset is required to deduct an amount equal to 1% of such sum as income tax. The responsibility of deducting TDS lies with the person making the payment, whether it be an individual, company, or any other entity. This means that if you buy a virtual digital asset such as a cryptocurrency or NFT, you are required to deduct 1% TDS from the payment you make to the seller. However, there are certain exemptions and conditions attached to this rule. For example, no TDS is required to be deducted if the consideration is payable by a specified person and the value or aggregate value of the consideration does not exceed ₹50,000 during the financial year. In the case of other persons, the threshold limit is ₹10,000 during the financial year. A specified person means an individual or Hindu Undivided Family (HUF) who does not have any income under the head “profits and gains of business or profession” or whose total sales, gross receipts or turnover from the business carried on by him does not exceed ₹1 crore, or in the case of a profession, ₹50 lakhs in the financial year immediately preceding the financial year in which such virtual digital asset is transferred.
Timing of TDS Deduction and Payment
The TDS under Section 194S is required to be deducted at the time of credit of such sum to the account of the resident or at the time of payment, whichever is earlier. Once the tax is deducted, it must be deposited with the government within the stipulated timeline. The person deducting the tax must also issue a TDS certificate (Form 16A) to the payee and file a TDS return (Form 26Q). The deductor is required to quote the PAN of the deductee while filing the TDS return and while depositing the tax deducted. In case the PAN is not furnished, TDS is required to be deducted at the rate of 20% as per the provisions of Section 206AA.
Valuation Challenges in TDS
One of the key challenges in implementing TDS provisions on virtual digital assets is the valuation of such assets. Since virtual digital assets are traded on various platforms and their value fluctuates rapidly, it becomes difficult to determine the exact amount on which TDS needs to be deducted. Furthermore, in cases where the consideration is partly or wholly in kind (for example, where one virtual digital asset is exchanged for another), it becomes difficult to deduct and deposit the TDS. In such cases, the CBDT has provided guidance, stating that the parties involved in the transaction must ensure that the tax is paid before releasing the consideration. This means that the person receiving the asset must deposit the TDS in advance and provide proof of payment before the transaction is executed.
GST Implications on Virtual Digital Assets
Apart from income tax, another aspect that needs to be considered while dealing with virtual digital assets is the applicability of the Goods and Services Tax (GST). Currently, there is no specific provision under the GST law for the taxation of virtual digital assets. However, the government is considering bringing these transactions under the GST regime. If virtual digital assets are classified as goods, their supply may attract GST at applicable rates. In such a case, exchanges and platforms facilitating the trade of virtual digital assets may be required to register under GST and collect tax on their services. Moreover, individuals and businesses engaged in the trade of virtual digital assets may also be liable to pay GST, depending on the nature and frequency of transactions.
International Transactions and FEMA Implications
The nature of virtual digital assets also brings into question the applicability of the Foreign Exchange Management Act (FEMA), especially in cases involving cross-border transactions. If an Indian resident is involved in buying or selling virtual digital assets to or from a non-resident, the transaction may attract FEMA provisions. However, due to the decentralized and borderless nature of such assets, it is difficult to monitor and regulate these transactions under the existing framework. The Reserve Bank of India (RBI) has expressed concerns about the use of cryptocurrencies in cross-border transactions, citing risks of money laundering, terror financing, and capital flight. Therefore, individuals and businesses engaging in such transactions must exercise caution and comply with all applicable laws and regulations.
Reporting Requirements and Tax Filing
Taxpayers dealing in virtual digital assets must ensure that they disclose their income and transactions accurately while filing their income tax returns. The income earned from the transfer of virtual digital assets must be reported under the head “Capital Gains” or “Income from Other Sources,” depending on the nature of the transaction. Additionally, if TDS has been deducted on such transactions, the taxpayer must claim credit for the same while filing the return. Failure to report income from virtual digital assets or non-compliance with TDS provisions may attract penalties, interest, and prosecution under the Income Tax Act. Therefore, it is essential for taxpayers to maintain proper documentation of all their transactions, including details of purchase, sale, consideration received or paid, and proof of TDS deduction and payment.
Reporting Requirements and Compliance
The government has introduced strict reporting norms to ensure transparency and accountability in virtual digital asset (VDA) transactions. Under the Income-tax Act, any person responsible for paying consideration to a resident for the transfer of a VDA must deduct tax at source (TDS) under section 194S. This applies when the payment exceeds Rs. 10,000 in a financial year. In case the payer is not a specified person, the limit is reduced to Rs. 50,000. The deducted amount must be deposited with the government, and Form 26Q or 26QE must be filed accordingly. These measures are intended to curb tax evasion and keep a record of VDA transfers. Further, Form 60C and other declarations are required in certain high-value or high-frequency transactions involving digital assets, to validate the source of funds and ensure compliance with Know Your Customer (KYC) norms.
Additionally, the Income Tax Return (ITR) forms now require specific disclosures related to income from VDAs. Taxpayers must report the type of asset, acquisition and sale dates, sale consideration, and cost of acquisition. This helps the tax department assess whether the correct tax has been paid on VDA transactions. Not disclosing VDA income or incorrect reporting can attract scrutiny and penalties under the Income-tax Act.
Penalties for Non-Compliance
Failure to comply with the tax provisions related to VDAs may result in severe consequences. Non-deduction or short deduction of TDS under section 194S attracts interest under section 201(1A) and penalty under section 271C. Non-reporting or misreporting of VDA income in ITR may lead to penalties under section 270A (for under-reporting or misreporting of income) and prosecution under section 276C in case of willful tax evasion. Additionally, taxpayers may be required to pay interest under section 234A/B/C for delay in payment or short payment of advance tax, if applicable.
The Income Tax Department has also enhanced its data analytics and AI-based tools to trace digital transactions. As exchanges and platforms are required to maintain user transaction records, the department can now easily trace discrepancies between reported and actual income. Thus, taxpayers dealing in VDAs must ensure full and accurate disclosure of their transactions and timely payment of taxes.
International Perspective and Evolving Framework
Globally, countries have taken different approaches to tax virtual digital assets. In the United States, cryptocurrencies are treated as property and are subject to capital gains tax. The United Kingdom also taxes them under capital gains provisions but provides detailed guidance on classification. Some countries like Germany provide exemptions for long-term holdings, while others like Portugal had historically offered tax exemptions but have started revising their policies due to rising adoption.
India’s framework is still evolving, and while it has taken a strong position with a flat tax and no deduction of expenses, further clarity may emerge through notifications or judicial pronouncements. The government has also indicated its commitment to work with other countries and international organizations like the OECD and G20 to develop a coordinated regulatory and taxation approach for VDAs. This is essential to prevent arbitrage and ensure a level playing field in the global digital economy.
Conclusion
The taxation of virtual digital assets in India has introduced both clarity and complexity for investors and traders. With a flat 30% tax rate on gains, 1% TDS on transfers, and restrictions on set-off of losses and expenses, the framework is designed to be stringent. Compliance with these rules is essential to avoid penalties and ensure transparency in financial reporting. As the digital asset ecosystem grows, the government is expected to provide more detailed guidance and streamline reporting mechanisms. Taxpayers must stay updated on regulatory developments and seek professional advice if required to navigate the complexities of VDA taxation.