Introduction
Cryptocurrencies are digital or virtual forms of currency that leverage cryptographic techniques to ensure security, making them highly resistant to counterfeiting or double spending. Unlike government-issued fiat currencies, cryptocurrencies operate on decentralized networks powered by blockchain technology—a distributed ledger maintained and validated by a network of computers known as nodes. While Bitcoin remains the most recognized cryptocurrency, the ecosystem includes thousands of alternatives, commonly referred to as altcoins, such as Ethereum, Litecoin, and Ripple. Cryptocurrencies serve diverse purposes, including facilitating peer-to-peer transactions, enabling cross-border remittances, and acting as an investment asset. They can be traded on cryptocurrency exchanges, stored in digital wallets, and, in some instances, used for purchasing goods and services.
The taxation landscape for cryptocurrencies in India has evolved significantly, particularly with the legislative changes introduced in 2022. Understanding these regulations is crucial for investors, traders, and legal professionals navigating the digital asset ecosystem. In recent years, the government has taken steps to bring digital currencies under the tax net, aiming to balance innovation with accountability. Given that the concept is new and replaces traditional currency, the government appears circumspect in regulating and monitoring the crypto market. The evolving taxation framework highlights India's attempt to navigate the complexities of the digital economy while ensuring fiscal responsibility.
How is Cryptocurrency Taxed in India?
The Government of India, by way of the Finance Act, 2022,
amended the Income Tax Act, 1961 ('Income Tax Act'),
introducing a new taxation regime for virtual digital assets. Since
2022, cryptocurrencies fall under the definition of Virtual Digital
Assets ('VDAs'), as defined in Section 2(47A) of the Income
Tax Act. VDAs include:
(i) a non-fungible token or any other token of a similar nature,
by whatever name called; and
(ii) any other digital asset as the Central Government may specify
by notification in the Official Gazette.
The following are the tax rates applicable to virtual digital assets:
- Section 115BBH of the Income Tax Act, amended by the Finance Act, 2022, imposes a flat 30% tax and a 4% cess on income generated from the transfer of cryptocurrencies. This applies to any gains from the sale or transfer of digital assets.
- Section 194S, newly introduced in the Income Tax Act, levies a 1% tax at source on transactions exceeding ₹10,000 in a financial year. TDS is also triggered if the aggregate payment exceeds ₹50,000 in the case of a specified person. This applies to private investors, commercial traders, or anyone transferring digital assets in a financial year.
- Taxpayers cannot claim deductions for expenses or losses incurred while trading cryptocurrencies, except for the cost of acquisition.
Starting from July 1, 2022, the buyer is responsible for deducting TDS at the 1% rate while making payment to the seller for the transfer of Crypto/NFT. If the transaction takes place on an exchange, the exchange may deduct the TDS and pay the balance to the seller. Indian exchanges automatically deduct TDS, while individuals trading on foreign exchanges must manually deduct TDS and file their TDS returns.
- P2P Transactions: In peer-to-peer (P2P)
transactions, the buyer is responsible for deducting TDS and filing
Form 26QE or 26Q, whichever is applicable.
Example: Buying cryptocurrency using INR over a P2P platform or international exchange. - Crypto-to-Crypto Transactions: TDS will be
applicable to both the buyer and the seller at 1%.
Example: Buying crypto with stablecoins.
It is important to note that TDS under Section 194S applies only at the time of purchasing VDAs from an Indian tax resident. Thus, if you are trading on an international exchange or a decentralized exchange (DEX), you will be interacting with a non-resident or a non-resident entity, which could lead to arguments regarding the inapplicability of Section 194S.
Schedule - Virtual Digital Assets
Since the financial year 2023-2024, Income Tax Return (ITR) forms now include a separate section called "Schedule - Virtual Digital Assets" for reporting any gains from VDAs.
The Income Tax Appellate Tribunal (ITAT), Jodhpur, recently, in the case of Raunaq Prakash Jain vs. ITO (ITAT Jodhpur), acknowledged cryptocurrencies as capital assets for taxation purposes. Regarding profits arising from the sale of cryptocurrency before April 1, 2022, the tribunal ruled that such profits shall be treated as capital gains. A taxpayer will be eligible to avail exemptions under the Income Tax Act for such gains. For example, taxpayers can claim benefits under Section 54F of the Income Tax Act if they reinvest their profits from cryptocurrency sales in residential properties. Additionally, if a taxpayer held cryptocurrency for more than three years, they could claim long-term capital gains tax, which attracts lower tax rates.
The tribunal further ruled that the Finance Act, 2022, which introduced stricter rules for taxing cryptocurrencies under Section 115BBH, is prospective in nature. Section 115BBH provides a flat tax rate of 30% on gains arising from transfers of such virtual digital assets. This applies to all transactions made after April 1, 2022, regardless of whether the cryptocurrency is held for the short term or long term. The Finance Act expressly disallows taxpayers from claiming any deductions against the proceeds of such transactions.
This ruling provides relief to taxpayers who sold cryptocurrencies before April 2022. They can treat their gains as capital gains instead of being taxed at a higher flat rate under the post-2022 rules. Sections 271C and 276B of the Income Tax Act provide for penalties in case of non-compliance with cryptocurrency taxation regulations.
Union Budget 2025-26
The Budget may have offered some relief to middle-class taxpayers, but cryptocurrency investors were left disappointed. Despite industry expectations for tax breaks, the government has chosen to stick with the steep 30% tax on crypto income and the 1% TDS on transactions. Adding to the regulatory oversight, Budget 2025 now mandates that banks and crypto exchanges regularly report transactions involving digital assets, covering both past and future activities. The definition of Virtual Digital Assets (VDAs) has also been expanded to include any item that leverages crypto-like technology.
While India still lacks a clear regulatory framework for cryptocurrencies, the introduction of a dedicated VDA section in ITR forms for FY 2023-24 signals the government's intent to keep a closer eye on crypto transactions. However, ambiguity persists, particularly around the classification of cryptocurrency futures and options (F&O), which continue to be taxed as business income rather than speculative income, like other VDAs.
Our Analysis
The legal framework for cryptocurrency taxation is continuously evolving, leading to a structured system that reflects the government's proactive approach to this emerging financial sector. By introducing a well-defined taxation regime, the post-amendment era seeks to address challenges such as revenue loss, compliance, and regulatory oversight while signalling the government's intention to formalize its stance on digital assets.
Now, banks will report crypto transactions regularly to the Income Tax Department. Earlier, only transactions that attracted TDS could be tracked. Now, all crypto transactions can be monitored via the Annual Information Statement (AIS).
The high 30% tax on profits and the 1% TDS on transactions significantly increase costs for companies engaged in crypto trading or accepting digital assets as payment. Additionally, since losses cannot be offset, businesses face financial constraints when integrating cryptocurrencies into their operations. With financial institutions now required to report crypto transactions, regulatory oversight has tightened. Companies must maintain precise financial records to ensure compliance, adding to the complexity of managing crypto dealings.
Despite these challenges, the government's increased focus on digital asset taxation suggests a move toward mainstream recognition. Companies that proactively align their operations with regulatory requirements will have an advantage in this shifting landscape. However, clearer guidelines on GST and loss treatment are essential to encourage wider corporate adoption of cryptocurrencies in India.
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