Crypto Tax Compliance in India: Report Your VDA Income and assets before It’s Too Late

This article delves into the taxation of Virtual Digital Assets (VDA) in India and throws light on reporting of VDAs and the income from such VDAs in the Income Tax Return (ITR).

1. Introduction

The rapid growth of cryptocurrencies, Non-Fungible Tokens (NFTs), and other blockchain-based digital assets has created new investment opportunities as well as regulatory challenges. To address the taxation of such assets, the Government of India introduced a specific tax regime for Virtual Digital Assets (VDAs) through the Finance Act, 2022 from 01.04.2023 i.e from the Assessment Year 2023-24 onwards vide introduction of section 115 BBH under the Income Tax Act’1961.

This framework inserted new provisions into the Income-tax Act, 1961 to regulate taxation and reporting of transactions involving virtual digital assets.

In this article we shall study the principal provisions governing VDA taxation in India including:

Section 2(47A) – Definition of Virtual Digital Asset

Section 115BBH – Taxation of income from transfer of VDA

Section 194S – TDS on transfer of VDA

Section 56(2)(x) – Taxability of VDA received as gift

Schedule VDA in ITR forms – Mandatory reporting of transactions

2. Meaning of Virtual Digital Asset

Section 2(47A) of the Income-tax Act defines a Virtual Digital Asset (VDA) as any information, code, number, or token generated through cryptographic means that provides a digital representation of value exchanged and can be transferred or traded electronically with or without consideration.

VDA includes:

• Non-Fungible Tokens (NFTs)
• Assets that typically rely on cryptographically secured distributed ledger technology or similar mechanisms.
• Bitcoin and Ethereum
• Digital tokens issued through blockchain networks
• Any other assets as the Central Government may notify as a digital asset

However, Indian currency and foreign currencies are excluded from the definition of VDAs.

3. Taxation of VDA Income under Section 115BBH

Section 115BBH, introduced by the Finance Act, 2022 effective from 01.04.2023 i.e AY 2023-24, provides a special framework for taxation of income arising from the transfer of Virtual Digital Assets (VDA).

3.1 Tax Rate

As per Section 115BBH, Income from the transfer of VDA is taxed at a flat rate of 30%, irrespective of the taxpayer’s income slab and the holding period, meaning the distinction between short-term and long-term capital gains is largely irrelevant for VDAs.

Surcharge and Health & Education Cess at 4% are levied as applicable.

3.2 Computation of Taxable Income

The taxable income/gain from transfer of VDA is computed as:

Sale Consideration – Cost of Acquisition = Taxable Income/Gain from VDA

This means that only the cost of acquisition will be allowed to be deducted from the sales consideration for calculation of gains/income from VDA, and no other expenditure, deduction or allowance is allowed for calculating income from transfer of VDA.

Expenses that are not deductible include:

Transaction or brokerage charges

Mining expenses

Infrastructure or electricity costs

Exchange platform fees etc.

3.3 Set-Off of Losses

One of the most stringent aspects of the VDA taxation regime is the restriction on Set-off of losses

Under Section 115BBH, Loss from transfer of VDA cannot be set off against any other income, also most importantly loss from transfer of one VDA cannot be set-off against profit from Transfer of another VDA.

Also, loss from transfer of VDAs cannot be carried forward to subsequent assessment years.

Therefore, we can say that any loss on transfer of VDA shall be completely ignored for calculation of Taxable income from VDA and shall not be allowed to be Set-off or carried forward to the subsequent years.

This provision seems pretty harsh but reflects the Government’s idea of discouraging people to invest in risky and volatile assets such as VDAs.

To give an example:

Despite the loss on transfer of Ethereum, tax will still be payable on ₹1,00,000 @ 30% plus Education Cess.

the loss on transfer of Ethereum of Rs. 40,000/- will not allowed to be set-off from any other income of the person neither will it be allowed to be carried forward meaning thereby the Loss from transfer of VDA is a dead loss with no real implications on reduction of Tax liability.

4. TDS on Transfer of VDA – Section 194S

Section 194S was also introduced w.e.f 01.07.2022 to ensure reporting and tracking of VDA transactions and to mandate Tax Deducted at Source (TDS) on VDA transfers with the following provisions:

• Rate of TDS – 1% TDS on the consideration paid for transfer of a VDA.
• TDS is applicable only if the transaction value exceeds the following limits in a financial year:

If the value exceeds the above threshold, the deductor must deduct TDS on the transaction.

4.3 Person Responsible for Deduction

The buyer or person making payment for transfer of VDA is responsible for deducting TDS

(crypto exchanges or intermediary may deduct and deposit the tax on purchase of VDA from above-mentioned persons including brokers on transactions involving such exchanges or intermediaries).

Where payment is wholly or partly in kind, the person responsible for paying such consideration shall ensure that tax has been paid prior to releasing such consideration. Also, no TAN is required for deducting Tax in case of a specified person.

5. Reporting of VDA Transactions in Income Tax Return (Schedule VDA)

To improve transparency and reporting of crypto transactions, the Income Tax Department introduced a separate schedule in ITR forms known as “Schedule VDA”.

This schedule requires taxpayers to report transaction-wise details of VDA transfers. The taxpayer must disclose the following details:

• Type of Virtual Digital Asset
• Date of acquisition
• Date of transfer
• Sale consideration
• Cost of acquisition
• Income from transfer
• TDS deducted under Section 194S

Each transaction must be reported separately to ensure accurate tax computation in light of the set-off of losses discussed above since the loss from transfer of one VDA shall not be allowed to be set-off against profit of other VDA.

Taxpayer must ensure not to report consolidated net gains from VDA which is a common mistake made by the taxpayers while reporting VDA income in the ITR.

6. Taxation of VDA Gifts

Virtual Digital Assets are also covered under Section 56(2)(x) of the Income-tax Act.

If a VDA is received:

• Without consideration, or
• For inadequate consideration

and the value exceeds ₹50,000, the amount is taxable in the hands of the recipient under “Income from Other Sources.”

However, gifts from relatives or on specified occasions such as marriage may qualify for exemption.

7. Reporting under foreign assets (schedule FA)

VDAs may be reported under foreign assets (schedule FA) in the ITR when you hold VDAs through foreign exchanges or wallets. If the exchange through which you have invested in VDAs is located outside then the VDA becomes your foreign asset and should be reported in schedule-FA of the ITR. Non-reporting of foreign assets triggers huge penalties and legal action under the Income Tax Act.

8. Investing and trading in VDA derivatives and spot transactions, Tax impact

The Tax treatment for transactions in VDA spot will be the same as discussed above and will be treated as a transfer of VDA as discussed above.

In case of transactions involving VDA derivatives, there is no clarification or clarity on the treatment of VDA derivatives like taxability under which head, Tax Audit, Turnover Computation etc. There are two different views as to the taxability of VDA derivatives. While one of the views treats the transactions in VDA derivatives as a normal transaction in VDAs with the same taxability as discussed above.

The other view takes a view that in the transactions involving VDA derivatives the underlying asset is not a VDA but a derivative therefore the treatment should be the same as other derivatives and can be treated as business income of the taxpayer. If the same is treated as business income, then the expenses on purchase and transfer of VDA can also be allowed as business expenses including mining expenses, Depreciation on computers etc and be deducted from the sales consideration to calculate the income from VDA. In the view of the author while the above treatment can be done. It would be better to treat the same as a capital gain and pay the taxes as per section 115BBH (in absence of any clarifications) to avoid future interest and penalties.

9. Taxability under the new Income Tax Act’2025

The taxability of VDA largely remains same under the new Income Tax Act, 2025 as it was under the old Act. Section 194 governs the taxability of VDA under the new Income Act’2025 which mirrors section 115BBH of the old Act where the tax rate remains at 30% and no deduction or allowance, expenses are allowed for calculation of income from transfer of VDA.

As in the Income Tax Act’1961, No set-off of losses from transfer of VDA will be allowed from VDA Income or any other income and the loss from VDA will not be allowed to be carried forward to the subsequent tax years under the new Income Tax Act’2025.

******

(The author is a Chartered Accountant and can be contacted at info@youronlinefilings.in or capratikanand@gmail.com or Mobile: +91-9953199493)