Crypto Tax Maze: Untangling Taxation of Virtual Digital Assets in India

Introduction

The story of cryptocurrency in India has been a roller-coaster ride, to say the least. From the Reserve Bank of India’s (RBI) ‘shadow ban’ in 2018 to the Supreme Court’s landmark judgment in Internet and Mobile Association of India v. RBI (2020), the journey has been one of ups and downs for the cryptocurrency ecosystem in the country.

However, the biggest change came with the introduction of the Finance Act, 2022, which brought Virtual Digital Assets (VDAs) within the tax fold. Fast forward to 2026, and the tax regime has crystallized into a very strict regime. Although the government has still to introduce a bill on the regulation of the utilization of cryptocurrency, it has arguably perfected the art of taxing it.

For the investor, the legal practitioner, and the Chartered Accountant, the need to know the nuances of the tax regime under Section 115BBH and the judicial landscape has become an obligation rather than a choice. In this article, the taxation regime applicable to VDAs in India has been examined, along with the various provisions and judicial decisions applicable in this sphere.

1. Defining the Asset: What is a VDA?

Before one can get into the tax rates applicable to VDAs, one must know the definition of the asset class itself. What exactly is a ‘Virtual Digital Asset,’ and how has the taxman defined it? The answer to this can be derived from the Finance Act, 2022, whereby the Income Tax Act, 1961, has been amended by the insertion of Section 2(47A), which defines VDA as follows:

• Any information, code, number, or token (not being Indian or foreign currency) generated through cryptographic means;
• Non-Fungible Tokens (NFTs); and
• Any other digital asset as notified by the Central Government.

Significantly, the definition of the asset class excludes gift cards, vouchers, and subscriptions to websites/platforms, thus ensuring that the taxman targets the higher-value asset class and leaves the lower-value asset class alone.

2. The Taxation Framework: The ‘30% + Cess’ Regime

VDAs are subject to taxation mainly under Section 115BBH, which came into effect on April 1, 2022. The taxation regime for VDAs is particularly rigorous compared to other asset classes, such as equity or mutual funds.

A. The Flat Tax Rate

Income resulting from the transfer of any VDA will be subject to a flat tax rate of 30%, as per Section 115BBH(1). The holding period of the asset does not matter. In the case of stocks, long-term capital gains are taxed at a lower rate than the normal income tax rate. However, gains from crypto assets will be taxed at the highest rate, similar to winnings from lotteries or other forms of speculation.

B. The ‘No Deduction’ Rule

Another major controversy surrounds Section 115BBH(2)(a). When calculating income resulting from the transfer of a VDA, no deductions are allowed for any expense, except the COA.

C. The Ban on the Set-off of Losses

For an investor, the most damaging provision of the Income Tax Act, 1961, with regard to the taxation of VDAs is Section 115BBH(2)(b). In this case, the loss resulting from the transfer of a VDA cannot be set off against income resulting from the transfer of another VDA or against income under any other head.

• Example: Suppose an investor earns a profit of Rs. 1 Lakh by trading Bitcoin and a loss of Rs. 80,000 by trading Ethereum. The investor cannot set off the loss against the profit. He will be required to pay 30% tax on the profit of Rs. 1 Lakh. The loss of Rs. 80,000 will be a ‘dead loss.’

3.The Surveillance Mechanism: TDS under Section 194S

To monitor the flow of transactions, the government introduced Section 194S, which is now effective from July 1, 2022.

– The Rule: If an individual is making a payment for the transfer of Virtual Digital Assets, then TDS is applicable at the rate of 1%. However, the deal value should exceed the specified amount, which is Rs. 10,000 or Rs. 50,000, depending on the payer.

– The Effect: This particular section removes the anonymity of cryptocurrency transactions. Indian exchanges are required to notify the Income Tax Department of each and every transaction, which is then recorded and ensures that no tax is evaded.

4. Emerging Judicial Trends: A Glimmer of Hope?

It is apparent that even in the midst of such a stringent regime, emerging judicial trends are interpreting these sections in a more nuanced manner.

A. Crypto as “Property”: Rhutikumari v. Zanmai Labs Pvt Ltd (2025)

In a significant development, the Madras High Court in Rhutikumari v. Zanmai Labs Pvt Ltd, which was decided in the latter half of 2025, finally ruled that Virtual Digital Assets are “property” in India.

– Significance: The significance of this decision is that it recognizes crypto not just as a speculative element but also as one which can be held in trust, attached in insolvency, or inherited. This decision bridges the gap between the concept of ‘taxable asset’ and ‘legally protected asset.’

B. Interest Deduction Allowed: Brijesh Poddar v. ITO (ITAT Agra)

A significant decision in favour of taxpayers under Section 115BBH was pronounced by the ITAT Agra Bench in the case of Brijesh Poddar v. ITO.

– Facts: The taxpayer took the loan to invest in crypto, on which interest was also paid. This interest was claimed to be part of the ‘Cost of Acquisition.’

– Ruling: The Revenue took the stand that the deduction is available only under the ‘purchase price’ head under Section 115BBH. However, the ITAT took the view that if the direct link exists, the interest incurred up to the date of acquisition can be capitalized into the ‘purchase price’ or ‘Cost of Acquisition.’

– Takeaway: This opens up the possibility for taxpayers to take loans to invest in crypto, but this must be done with proper documentation.

5. Regulatory Compliance: The FIU-IND Mandate

Taxation, of course, is only half the story. The other half is ensuring you are on the right side of money laundering regulations. From March 2023, VDA service providers like exchanges, wallets, and the like have come under the Prevention of Money Laundering Act, 2002. This means all exchanges in India, including offshore exchanges that operate in India, must register with the FIU-IND. If they do not, the consequences of non-compliance have been starkly evident in the first half of 2024 and 2025, when the URLs of several of the large offshore exchanges like Binance or KuCoin were blocked until they conformed to PMLA regulations.

Advisory for Investors: Trading on non-compliant offshore exchanges can have severe consequences. If the exchange has not registered with the FIU-IND, it cannot operate with Indian banks, which can lead to your money being blocked under the Black Money Act.

6. Practical Challenges and “Grey Areas”

In spite of the law being in place, there are several practical challenges for the taxpayer in the year 2026:

1) Peer to Peer Trading Risks: A lot of people use P2P trading to avoid exchange charges. However, this has led to a large number of bank account freezes. If the money in the account of the person you are trading with has been earned through illegal sources such as cyber crime, then your account can be frozen by the Cyber Cell. This means you have to keep a high level of KYC checks in place for your P2P trading partners—a virtually impossible task for anonymous users.

2) Airdrops and Staking Rewards: The taxman wants to know about airdrops. The general view is that airdrops are taxed at a normal rate under the head ‘Income from Other Sources’ under Section 56 of the Act. However, when the airdrops are sold, the capital gains are taxed at a flat 30% under Section 115BBH. The double taxation creates a tricky situation for the taxpayer.

3) Loss Set Off Ambiguity: The act specifically disallows netting losses between VDAs; however, there is ambiguity over whether losses incurred from trading the same asset multiple times a day (for example, buying and selling Bitcoin multiple times a day) can be set off against each other. The conservative view is that they cannot be set off, whereas a more aggressive tax planning view is that they can be set off, pending clearer rulings from tribunals.

Conclusion

As we navigate through 2026, the taxation of Virtual Digital Assets in India has matured from ambiguity to a hard-coded reality. The government’s stance is clear: discourage speculation through high taxation while ensuring total traceability through TDS and PMLA.For the investor, the “Wild West” days are over. The strategy must shift from chasing moonshot gains to ensuring rigorous compliance. While the Brijesh Poddar judgment offers a glimmer of leniency regarding interest costs, the overarching regime remains prohibitive. The future likely holds a comprehensive “Crypto Bill” that might finally address the utility aspect of Web3 technology. Until then, Section 115BBH remains the formidable gatekeeper of India’s digital asset economy.

References

• The Income Tax Act, 1961, No. 43 of 1961, Sections 2(47A), 56, 115BBH, and 194S (India).
• The Finance Act, 2022, No. 6 of 2022 (India).
• Internet and Mobile Association of India v. Reserve Bank of India, (2020) 10 SCC 274 (India).
• Rhutikumari v. Zanmai Labs Pvt. Ltd., Madras High Court, 2025 (unreported judgment).
• Brijesh Poddar v. Income Tax Officer, ITAT Agra Bench, 2025 (unreported decision).
• Prevention of Money Laundering Act, 2002, No. 15 of 2003 (India).
• Ministry of Finance, Notification S.O. 1072(E), March 7, 2023 (bringing Virtual Digital Asset service providers under PMLA reporting entities).
• Central Board of Direct Taxes (CBDT), Circular No. 13/2022, Guidelines on TDS under Section 194S (June 22, 2022).
• The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, No. 22 of 2015 (India).
• Financial Intelligence Unit – India (FIU-IND), Compliance Framework for VDA Service Providers (2023).

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Author: Aasmeen Kaur | Lovely Professional University