Taxation of Virtual Digital Assets (VDAs) in India: Impact on investors & traders

The digital asset space is evolving rapidly, and India is no exception. From 1st April 2022, the government rolls out a formal tax regime for Virtual Digital Assets (VDAs) like cryptocurrencies, Non-Fungible Tokens (NFTs), and similar cryptographic tokens. This step comes through the Finance Act, 2022, marking India’s entry into the regulated crypto-tax world.

This framework under the Income Tax Act, 1961, impacts everyone—solo investors, traders, exchanges, and businesses. The aim is simple: regulate the chaos, bring transparency, and ensure the government doesn’t miss out on revenue from this booming digital economy.

Let’s say someone buys Bitcoin for ₹50,000 and sells it for ₹80,000. That ₹30,000 profit is now taxable at a flat 30 percent.

What is a Virtual Digital Asset (VDA)?

As per Section 2(47A) of the Income Tax Act, a VDA includes any information, code, number, or token (not being Indian or foreign currency), generated through cryptographic means or otherwise, and capable of being transferred, stored, or traded electronically.

That means Bitcoin, Ethereum, Dogecoin, and even NFTs fall under this definition. And yes, the government can keep updating this list—so new tokens can be brought under the scanner any time.

Are tokenized real-world assets considered VDAs?

No. If a digital token represents a legal claim to a physical asset—like real estate, gold, or artwork—and that ownership is enforceable by law, it doesn’t fall under VDA tax rules. For instance, an NFT that’s just an image is taxable. But if the same NFT represents legal ownership of a painting in the real world, it might escape this regime.

That said, a lot depends on how regulators interpret each case. So if you’re building or investing in tokenized real assets, legal advice is a must.

Is the RBI’s Digital Rupee a VDA?

No. The Digital Rupee, issued by the Reserve Bank of India, is legal tender. It’s treated like any physical currency and hence, exempt from VDA taxation.

But here’s where it gets tricky—many people confuse stable coins or exchange tokens with the Digital Rupee. They’re not the same. Only the RBI-backed version is considered currency under Indian law.

Breakdown of VDA Tax Provisions

India’s VDA tax policy has some rigid rules. Let’s break them down:

1. Flat 30% tax on profits: Whether you earn ₹100 or ₹1 crore, the tax is 30% on the entire profit—plus cess and surcharge. There’s no slab benefit like with salary or business income.
2. No deductions allowed: Forget claiming costs like gas fees, mining charges, internet bills, or platform charges. You can only deduct the cost of purchasing the VDA.
3. No set-off or carry-forward of losses: Losses from crypto trades? They can’t be set off against any other income—not stocks, not salary, not even other crypto gains. And they can’t be carried forward to the next year either. So, if you lose ₹40,000 on Shiba Inu and gain ₹20,000 on Ethereum, you’ll still pay 30% tax on ₹20,000. The loss gets ignored.
4. 1% TDS on all transactions: No TDS is required to be deducted if the consideration for VDA transfer does not exceed ₹50,000 in a financial year and is payable by a “specified person” (i.e., an individual or HUF with business turnover up to ₹1 crore or professional receipts up to ₹50 lakh in the previous year, or someone with no business/professional income). Platforms like WazirX, CoinDCX, and ZebPay already auto-deduct this. But if you’re doing P2P or using foreign platforms, you’re responsible for paying for it manually.
5. Gifted VDAs are taxable: Received Bitcoin as a birthday gift? It’s taxable unless it’s from a close relative or under specific exemptions, like during marriage. The fair market value is added to your “Income from Other Sources” and taxed accordingly.

Reporting VDA Income in ITR

Starting FY 2022–23, the Income Tax Return (ITR) forms include a new “Schedule VDA” where individuals must report income from crypto or NFTs. This is mandatory. Not reporting it can attract penalties or scrutiny from the tax department.

So even if you made just one trade, if there was a gain, it needs to be reported.

Does GST apply to VDAs?

This is still unclear. As of now, there’s no standard GST rate applied. A committee has recommended a 28% GST (similar to gambling and casinos), but it hasn’t been formally implemented yet. For exchanges, this creates major complications. Should they charge GST on trading fees? On the entire value? It’s confusing and needs clarity.

How are exchanges and startups reacting?

The Indian crypto ecosystem feels the heat.

Trading volumes on Indian exchanges dropped sharply post-implementation of TDS.

Users shifted to foreign platforms with less regulation.

Web3 startups moved their headquarters to friendlier jurisdictions like Dubai or Singapore.

Meanwhile, the government still managed to collect ₹157 crore in TDS in just 9 months. So, from a compliance point of view, it’s working.

Many founders believe the current tax policy treats crypto more like speculative gambling than an emerging asset class. Without loss adjustment or long-term capital gains classification, serious investors are discouraged.

Real-life scenario: A young investor’s experience

Take Aniket, a 24-year-old freelancer from Pune. He started investing ₹5,000 a month in cryptocurrencies through an Indian exchange. After six months, his portfolio showed a gain of ₹18,000.

When he decided to cash out, not only was his profit taxed at 30%, but 1% TDS was also deducted on each sell transaction. His net gain reduced significantly. Add to that the hassle of tracking every trade and filing the VDA schedule in ITR, and he found himself wondering if mutual funds were a better deal.

Summary Table: VDA Tax Rules

How are international transactions taxed?

If an Indian resident trades or earns income from VDAs through a foreign platform, the income is still taxable in India. The location of the exchange does not change the tax liability. The profits must be declared in the ITR, and TDS compliance still applies if the payment is made to an Indian resident.

Can VDA losses be adjusted?

No. Under Section 115BBH, any loss incurred from trading in VDAs cannot be adjusted against income from any other source. For example, if a person earns ₹50,000 from stocks and loses ₹30,000 in crypto, the crypto loss cannot reduce the taxable amount. It also cannot be carried forward to the next financial year.

What if you receive crypto as a gift or payment?

Crypto received as a gift is taxed under “Income from Other Sources” if the total value exceeds ₹50,000 in a year. If received as payment for services, it is considered income and taxed as per the applicable slab rates, not under capital gains. The recipient must also maintain proper records of the transaction value at the time of receipt.

Conclusion

India’s VDA tax policy is a bold step towards bringing digital assets under the regulatory fold. It ensures transparency, captures revenue, and discourages tax evasion. But it also creates real challenges for genuine investors, developers, and startups in the space.

While tax is now non-negotiable in the digital economy, the framework must evolve. A balance between regulation and innovation is key. Until then, whether you’re trading memes or minting NFTs, it’s best to stay compliant—and informed.