Taxation Aspects Pertaining to Cryptocurrency in India

Introduction

The emergence of cryptocurrency and other digital assets has fundamentally transformed the global financial landscape, presenting both unprecedented opportunities and complex regulatory challenges. India, home to millions of cryptocurrency investors and traders, has witnessed exponential growth in virtual asset transactions over recent years. This surge necessitated a clear taxation framework to govern the burgeoning digital economy. The Indian government’s approach toward cryptocurrency taxation represents a delicate balance between recognizing the potential of blockchain technology and addressing concerns related to revenue collection, investor protection, and financial stability.

Unlike many jurisdictions worldwide that have either banned cryptocurrencies outright or embraced them with comprehensive regulatory frameworks, India has adopted a unique middle path. While cryptocurrency trading remains legal following judicial intervention, the government has implemented one of the strictest taxation regimes globally for virtual digital assets. The Finance Act, 2022 marked a watershed moment by introducing specific provisions for taxing income from cryptocurrency transactions, thereby formally acknowledging the existence and economic significance of digital assets in India [1].

This taxation framework operates within a broader legal context where cryptocurrency remains unregulated by dedicated legislation. The absence of a specific crypto law creates an interesting dynamic where these assets are recognized for tax purposes but not accorded the status of legal tender. This article examines the taxation aspects pertaining to cryptocurrency in India, exploring the relevant legal provisions, regulatory mechanisms, and judicial pronouncements that shape this evolving domain.

Understanding Virtual Digital Assets Under Indian Law

The Income Tax Act, 1961, as amended by the Finance Act, 2022, introduced the term “Virtual Digital Asset” to encompass cryptocurrencies and related digital tokens within the taxation framework. This definitional approach reflects the government’s intent to create an expansive tax net capable of capturing various forms of digital assets.

The definition of Virtual Digital Asset finds expression through Section 2(47A) of the Income Tax Act, which provides that a VDA means any information or code or number or token, not being Indian currency or foreign currency, generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account including its use in any financial transaction or investment but not limited to investment scheme, and which can be transferred, stored or traded electronically [2].

This definition deliberately employs broad language to encompass not merely current forms of cryptocurrencies like Bitcoin and Ethereum but also future iterations of digital assets that may emerge. The definition explicitly includes non-fungible tokens and any other token of similar nature. By avoiding narrow technical specifications, the legislature has ensured that the taxation framework remains relevant even as blockchain technology evolves.

The Central Board of Direct Taxes has exercised its notification powers to exclude certain digital assets from the definition of VDA. Through Notification No. 74/2022 and Notification No. 75/2022 dated June 30, 2022, the government excluded gift cards, vouchers, mileage points, reward points, loyalty cards, and subscriptions to websites or platforms from the VDA definition. Additionally, NFTs whose transfer results in the transfer of ownership of underlying tangible assets that are legally enforceable have been excluded from this classification [3].

This definitional framework represents a significant departure from the pre-2022 scenario where no specific provisions addressed cryptocurrency taxation. Previously, gains from crypto transactions were treated under general principles applicable to either capital gains or business income, depending on the nature and frequency of transactions. The introduction of VDA-specific provisions has eliminated much of this ambiguity, creating a uniform taxation regime.

Taxation of Income From Transfer of Virtual Digital Assets

The cornerstone of India’s cryptocurrency taxation framework rests upon Section 115BBH of the Income Tax Act, which prescribes a flat tax rate of thirty percent on income arising from the transfer of virtual digital assets. This provision, effective from April 1, 2022, represents one of the most stringent taxation regimes for cryptocurrencies globally.

Section 115BBH stipulates that when the total income of an assessee includes any income arising from the transfer of a virtual digital asset, the income tax payable shall be computed on the income generated from such transfer at the rate of thirty percent. This rate applies uniformly regardless of the taxpayer’s income bracket, effectively treating cryptocurrency gains similarly to winnings from lotteries or horse races. The applicable surcharge and health and education cess at four percent are levied in addition to this base rate [4].

The provision contains particularly restrictive conditions regarding deductions and loss adjustments. No deduction in respect of any expenditure or allowance shall be permitted while computing income from VDA transfer, except the cost of acquisition. This means expenses such as transaction fees, platform charges, electricity costs for mining, internet charges, or advisory fees cannot be claimed as deductions. Furthermore, losses arising from the transfer of virtual digital assets cannot be set off against income computed under any other provision of the Act. This prohibition extends to both intra-head adjustment and inter-head set-off, meaning losses from one cryptocurrency cannot offset gains from another, nor can crypto losses reduce income from salary, business, or capital gains from other assets [5].

The concept of “transfer” for VDA taxation purposes draws from the general definition provided in Section 2(47) of the Income Tax Act. Transfer includes sale, exchange, relinquishment of the asset, extinguishment of rights therein, compulsory acquisition under law, conversion of capital asset into stock-in-trade, and any transaction enabling enjoyment of immovable property. Consequently, not only outright sales but also cryptocurrency swaps, usage for purchasing goods or services, and gifting qualify as taxable transfers.

For transactions occurring before April 1, 2022, the general provisions of capital gains taxation or business income taxation applied. Taxpayers could classify their crypto activities as either investment-oriented or business-oriented, with corresponding tax treatment. Long-term capital gains enjoyed preferential rates, and business losses could be set off against business income. The transition to the Section 115BBH regime represented a substantial increase in tax burden for most cryptocurrency traders and investors.

Tax Deduction at Source on Cryptocurrency Transactions

Complementing the direct taxation of cryptocurrency gains, the government introduced a mechanism for tax collection at source through Section 194S of the Income Tax Act. This provision mandates withholding tax on payments made for the transfer of virtual digital assets, creating a dual-layer taxation architecture designed to enhance compliance and reduce tax evasion.

Section 194S, effective from July 1, 2022, requires any person responsible for paying any sum to a resident as consideration for transfer of a virtual digital asset to deduct tax at source at one percent of such sum. The threshold for applicability differs based on the category of the payer. For specified persons, defined as individuals or Hindu Undivided Families whose gross receipts or turnover from business do not exceed one crore rupees or gross receipts from profession do not exceed fifty lakh rupees in the preceding financial year, the threshold is fifty thousand rupees. For all other persons, the threshold is ten thousand rupees in the financial year [6].

The Central Board of Direct Taxes issued Circular No. 13/2022 dated June 22, 2022, providing detailed guidelines for implementation of Section 194S. The circular clarifies that when transactions occur through an exchange, the exchange assumes primary responsibility for TDS deduction. In broker-mediated transactions, the broker can undertake TDS deduction pursuant to a written agreement with the exchange. For peer-to-peer transactions outside exchanges, the buyer bears responsibility for TDS compliance.

An important aspect of Section 194S implementation concerns consideration paid in kind or through exchange of one VDA for another. Where payment is wholly or partly in kind, the person responsible for paying such consideration must ensure tax has been paid before releasing the consideration. If consideration comprises both cash and kind, and cash is insufficient to cover the TDS amount, the deductor must pay the shortfall from their own funds. This provision prevents circumvention of TDS through non-cash transactions.

The quarterly reporting requirement under Form 26Q ensures systematic tracking of VDA transactions. Every deductor must furnish details of tax deducted on VDA transfers, enabling tax authorities to match deductions with income reported by recipients. This creates an audit trail that significantly enhances enforcement capabilities.

Regulatory Framework Beyond Taxation

While taxation provisions provide fiscal clarity, the broader regulatory landscape for cryptocurrencies in India extends beyond revenue collection to encompass anti-money laundering compliance and consumer protection considerations. The Prevention of Money Laundering Act, 2002 has emerged as a critical instrument for regulating cryptocurrency service providers.

On March 7, 2023, the Ministry of Finance issued a notification bringing Virtual Digital Asset service providers within the ambit of the Prevention of Money Laundering Act. This notification classified VDA service providers as reporting entities under the PMLA, subjecting them to comprehensive anti-money laundering and counter-terrorist financing obligations. Cryptocurrency exchanges, wallet providers, and other platforms facilitating VDA transactions must now register with the Financial Intelligence Unit of India and comply with stringent compliance requirements [7].

The FIU-IND registration mandate applies to both domestic and offshore cryptocurrency exchanges serving Indian users. Registered entities must implement robust Know Your Customer procedures, maintain transaction records for at least five years, appoint designated directors and principal officers responsible for compliance, conduct enhanced due diligence on customers, and submit Suspicious Transaction Reports when warranted. Non-compliance attracts significant penalties, with the Enforcement Directorate having imposed fines totaling twenty-eight crore rupees during fiscal year 2024-25 alone for AML violations [8].

This regulatory framework represents a significant evolution from the pre-2023 landscape where cryptocurrency exchanges operated without specific AML obligations. The PMLA framework ensures that while cryptocurrency trading remains legal, it occurs within a controlled environment that prevents misuse for money laundering, terrorism financing, or other illicit activities.

Judicial Intervention and Constitutional Validity

The legal status of cryptocurrency in India has been substantially influenced by judicial pronouncements, particularly the landmark Supreme Court judgment in Internet and Mobile Association of India v. Reserve Bank of India. This case represents the most significant judicial intervention in India’s cryptocurrency landscape and continues to shape regulatory approaches.

In April 2018, the Reserve Bank of India issued a circular prohibiting all entities regulated by it, including banks and financial institutions, from providing services to persons or entities dealing with or settling virtual currencies. This circular effectively prevented cryptocurrency exchanges from accessing banking channels, thereby crippling the industry. Multiple petitions challenged this circular before the Supreme Court, arguing it violated fundamental rights and exceeded the RBI’s regulatory authority.

The Supreme Court, in its judgment dated March 4, 2020, struck down the RBI circular on grounds of proportionality. The Court held that while the RBI possessed regulatory powers concerning payment systems and the potential to address concerns related to virtual currencies, a complete prohibition on banking services was disproportionate. The Court examined whether less restrictive measures could achieve the RBI’s objectives and found that the central bank had failed to demonstrate empirical evidence of harm suffered by regulated entities due to cryptocurrency transactions [9].

Justice Rohinton Fali Nariman, writing for the bench comprising Justices Aniruddha Bose and V. Ramasubramanian, observed that virtual currencies had the capability of being accepted as valid payment for goods and services, bringing them within the RBI’s regulatory ambit. However, the Court emphasized that the decision to prohibit an article as res extra commercium must arise from legislation rather than executive action. The judgment reinforced the principle that fundamental rights under Article 19(1)(g) guaranteeing freedom to practice any profession or carry on any occupation, trade or business could not be disproportionately restricted without statutory backing.

The Supreme Court’s decision in Internet and Mobile Association of India revitalized the cryptocurrency industry, enabling exchanges to resume operations with banking support. However, the Court explicitly clarified that its judgment did not pronounce on the legality or illegality of cryptocurrencies themselves, merely on the disproportionality of the RBI’s prohibition. This distinction remains significant, as cryptocurrencies continue to exist in a regulatory grey area, neither explicitly banned nor comprehensively regulated by dedicated legislation.

Classification and Reporting Requirements

The Income Tax Act mandates specific reporting requirements for income derived from virtual digital assets, creating detailed disclosure obligations for taxpayers. The introduction of Schedule VDA in Income Tax Return forms represents a significant administrative development designed to enhance transparency and compliance.

Taxpayers deriving income from VDA transfers must file either ITR-2 for capital gains or ITR-3 for business income, as the simplified ITR-1 and ITR-4 forms cannot be used when VDA income exists. Schedule VDA requires comprehensive details including dates of acquisition and transfer, cost of acquisition, sale consideration, and quarterly breakup of VDA income. This granular reporting enables tax authorities to track cryptocurrency transactions systematically.

The classification of cryptocurrency income presents interesting questions regarding characterization under different heads of income. While Section 115BBH applies a uniform thirty percent rate regardless of classification, taxpayers must still determine whether their activities constitute capital gains or business income. Investors holding cryptocurrencies as capital assets report gains under the capital gains head in Schedule VDA, whereas frequent traders operating systematic profit-seeking ventures classify income under business income.

For cryptocurrencies received as gifts, taxation occurs under the head “Income from Other Sources” pursuant to Section 56(2)(x) of the Income Tax Act. Gifts of virtual digital assets exceeding fifty thousand rupees from non-relatives are taxable at the recipient’s applicable slab rates rather than the flat thirty percent rate. This distinction is crucial, as gift taxation occurs at receipt rather than subsequent transfer, and uses marginal tax rates rather than the VDA-specific rate.

Mining rewards, staking income, and airdrop receipts present additional classification challenges. While specific guidance remains limited, these receipts are generally treated as income from other sources taxable at slab rates upon receipt. Subsequently, when these assets are sold or exchanged, Section 115BBH taxation applies on any appreciation in value from the receipt date, with the fair market value at receipt serving as the cost of acquisition.

Global Context and Comparative Analysis

India’s cryptocurrency taxation framework exists within a global context where different jurisdictions have adopted varied approaches. Understanding comparative frameworks illuminates both the stringency and unique characteristics of India’s regime.

The thirty percent flat tax rate on cryptocurrency gains in India ranks among the highest globally. Most developed economies tax cryptocurrencies as either capital gains or income, with rates varying based on holding periods and individual tax brackets. The United States, for instance, applies long-term capital gains rates ranging from zero to twenty percent for assets held over one year, while short-term gains are taxed at ordinary income rates. The European Union member states employ diverse approaches, with some treating cryptocurrencies as currency and others as property, but generally providing more favorable treatment than India’s flat thirty percent rate.

The prohibition on loss set-off represents another distinctive feature of India’s regime. Most jurisdictions permit cryptocurrency losses to offset either other crypto gains or capital losses from different asset classes. This flexibility allows investors to manage tax liabilities across their entire portfolio. India’s restriction creates asymmetry where gains are taxed without corresponding relief for losses, potentially discouraging legitimate investment.

The one percent TDS requirement also distinguishes India’s approach. While some countries have reporting requirements or withholding mechanisms, few implement TDS at the relatively low threshold levels prescribed in Section 194S. This extensive withholding net ensures high compliance but imposes significant administrative burden on exchanges and users.

Conclusion

The taxation framework for cryptocurrencies in India reflects a distinctive regulatory philosophy that acknowledges the economic reality of digital assets while implementing stringent fiscal controls. Through the Finance Act, 2022, the government has created a clear taxation structure that eliminates previous ambiguities regarding cryptocurrency income treatment. The thirty percent flat tax rate, restriction on deductions, prohibition on loss set-off, and comprehensive TDS mechanism collectively constitute one of the world’s most rigorous cryptocurrency taxation regimes.

This framework operates alongside anti-money laundering regulations under the Prevention of Money Laundering Act that subject cryptocurrency service providers to extensive compliance obligations. The registration requirements with FIU-IND, KYC mandates, and suspicious transaction reporting create a controlled environment for cryptocurrency activities while preventing misuse for illicit purposes.

Judicial intervention, particularly through the Supreme Court’s decision in Internet and Mobile Association of India v. Reserve Bank of India, has been instrumental in preserving the legal viability of cryptocurrency trading. While affirming regulatory authority, courts have insisted upon proportionality and legislative backing for restrictions, establishing important constitutional safeguards.

Despite this elaborate taxation and regulatory architecture, cryptocurrencies in India continue operating without dedicated comprehensive legislation. The absence of a crypto-specific law creates ongoing uncertainty regarding numerous aspects including consumer protection, dispute resolution mechanisms, and the precise legal status of digital assets. While the taxation framework provides fiscal clarity, fundamental questions about the regulatory treatment of cryptocurrencies remain unresolved.

As the cryptocurrency ecosystem continues evolving globally and within India, the existing taxation framework will likely require periodic refinement. Emerging developments such as decentralized finance protocols, central bank digital currencies, and novel token structures may test the boundaries of current definitions and provisions. The government’s approach toward these developments will significantly shape India’s position in the global digital economy.

The current taxation regime demonstrates that India has chosen engagement over prohibition regarding cryptocurrencies. By creating a detailed tax framework while implementing strict compliance requirements, the government seeks to harness revenue from this growing sector while maintaining fiscal control. Whether this approach optimally balances innovation encouragement with regulatory objectives remains an evolving question as both technology and regulatory frameworks continue developing.

References

[1] Lexology. (2025). Guide on cryptocurrency and taxation in India. Retrieved from https://www.lexology.com/library/detail.aspx?g=bc50db55-2498-4920-9d53-648c08043b09 

[2] Majmudar & Partners. (2025). Indian tax implications in cryptocurrency transactions. Retrieved from https://www.majmudarindia.com/indian-tax-implications-cryptocurrency/ 

[3] PWC India. Taxation framework of virtual digital assets. Retrieved from https://www.pwc.in/tax-knowledge-hub/taxation-framework-of-virtual-digital-assets.html 

[4] ClearTax. (2025). Taxation on cryptocurrency: Guide to crypto taxes in India 2025. Retrieved from https://cleartax.in/s/cryptocurrency-taxation-guide 

[5] Koinly. Crypto taxes India: Expert guide 2026. Retrieved from https://koinly.io/guides/crypto-tax-india/ 

[6] TaxGuru. (2025). Taxation of virtual digital assets (VDAs) under Income-tax Act, 1961. Retrieved from https://taxguru.in/income-tax/taxation-virtual-digital-assets-vdas-income-tax-act-1961.html 

[7] Lexology. (2023). Cryptocurrency trading subject to anti-money laundering laws. Retrieved from https://www.lexology.com/library/detail.aspx?g=0e6e9a42-fb65-4a69-9b09-38c405a3bda0 

[8] Crypto.news. (2026). India’s FIU-IND puts crypto under full AML scope with strict KYC rules. Retrieved from https://crypto.news/indias-fiu-ind-puts-crypto-under-full-aml-scope-with-strict-kyc-rules/ 

[9] Oxford Law Blogs. (2020). Let’s trade crypto: Indian Supreme Court quashes prohibition. Retrieved from https://blogs.law.ox.ac.uk/business-law-blog/blog/2020/03/lets-trade-crypto-indian-supreme-court-quashes-prohibition