VDA Tax Under Income Tax Act 2025: Cross-Border Gaps and CARF

Taxation of Cryptocurrency under Income Tax Act 2025 Pending Issues in Cross Border VDA Transactions

Summary: India’s Income Tax Act 2025 (superseding the 64-year old Income Tax Act 1961, effective 1 April 2026) preserves the key virtual digital asset (VDA) taxation regime introduced by the Finance Act 2022 (30% flat tax rate, no loss set-off, 1% TDS), renumbers the operative provisions and widens the VDA definition to explicitly include ‘crypto-assets’. But, while welcome, there are still some key points that remain unanswered as to how cross-border crypto transactions, DeFi participation, mining income, airdrop receipts and the upcoming OECD CARF mandate will be taxed. This essay discusses these open issues and their implications for Indian residents and enterprises in the virtual digital resources.

Introduction

Effective from 1 April 2022, the Finance Act 2022 brought in India’s first comprehensive statutory framework for taxation virtual virtual assets (VDAs) comprising cryptocurrencies, non-fungible tokens (NFTs) and any asset notified by the Central Government. The system, codified under Section 115BBH and Section 194S of the Income Tax Act 1961, levied a flat 30% tax on income from VDA transfers with no deductions (other than cost of acquisition), no loss set-off allowed and a 1% Tax Deducted at Source on selling consideration.

This framework has now been carried forward with some revisions in the Income Tax Act 2025 (IT Act 2025) which gained the Presidential assent on 21 August 2025 and came into force from 1 April 2026 replacing the 1961 Act in its entirety. The Central Board of Direct Taxes (CBDT) has notified Income Tax Rules, 2026 on 20th March, 2026 to give effect to the new Act.

The essence of VDA taxes is mostly intact but two developments make a fresh study needed. Firstly, the IT Act 2025 increases the concept of VDA to also include ‘crypto-assets’ as a sub-category, with reporting duties under the newly added Section 509(1) for designated businesses. Second, India has agreed to implement the OECD’s Crypto-Asset Reporting Framework (CARF) by April 2027, which will automate the sharing of cross-border transaction information between tax agencies. Together, these developments mean that it is vital for taxpayers, advisers and businesses to understand what the new Act resolves and what it doesn’t.

The Core VDA Tax Framework Under IT Act 2025

A. Tax Rate and Allowances

IT Act 2025 has kept the fixed rate of 30% income tax on income deriving from transfer of any VDA. The effective rate with 4% Health and Education Cess is 31.2%. Effective rate may be further increased by applicable surcharges (between 10% and 37% depending on total income). There is no difference for holding periods: gains from owning VDAs for one day or 10 years are taxed at the same 30% rate. The only allowable deduction is the cost of acquisition. Any costs associated with the VDA transfer (broking, petrol fees, platform commissions or Internet rates) are not deductible. This is a far stricter regulation as compared to the one that applies to equities, where broking and Securities Transaction Tax (STT) are allowed as deductions against gains.

B. Prohibition of Loss Set-Off

Losses on transfer of VDA cannot be taken off against any other income – pay, company revenue, capital gains from shares or even gains from previous VDA transactions. Nor can such losses be carried forward to future evaluation years. The taxpayer who makes a profit on Bitcoin and a loss on Ethereum in the same financial year will pay tax on the Bitcoin profit and get no relief for the Ethereum loss. This is a total prohibition.

C. TDS under Section 194S (New Number)

Thus the TDS duty on VDA sale consideration i.e. 1% deduction at source by the buyer or by the exchange acting as facilitator is kept in the IT Act 2025 with renumbered section references. TDS is applicable on consideration exceeding ₹50,000 in a financial year (₹10,000 in certain specific instances). The amended FAQs of CBDT makes it clear that the activities taking place on or before 31 March 2026 will come under the ambit of Section 194S of 1961 Act and the events taking place from 1 April 2026 would come under the successor provisions of 2025 Act.

D. Expanded Definition of a VDA: Inclusion of ‘Crypto-Asset’

The Finance Act 2025 changed the definition of VDA by including the words “crypto-asset” as a separate sub-clause with effect from 1 April 2026. This extension matches Indian tax law with the OECD CARF taxonomy which broadly defines “crypto-assets” to include assets that use distributed ledger technology, regardless of their characterisation under securities legislation or commodity law. This effectively brings into the Indian tax net any digital asset that was not previously encompassed by the 2022 definition, addressing possible definitional gaps around newer defi tokens and layer-2 assets.

Open Issues: International Transactions

The IT Act 2025 provides some continuity but there are still some major cross-border issues that are not addressed in the act and not resolved in CBDT guidance.

1. Offshore Exchange Transactions: Shortfall in Enforcement of TDS

1% TDS shall be deducted on a VDA transaction by a ‘specified person’ or a ‘exchange’ supporting such transaction, as per Section 194S. But if an Indian tax resident trades on a foreign-domiciled exchange that is not required to deduct TDS under Indian law, neither the exchange nor the foreign buyer will deduct TDS. The Indian resident taxpayer has to self-declare the transaction and pay the liability but without automatic exchange of information, enforcement is entirely based on voluntary disclosure.

CBDT has not yet released any guidance whether Indian residents dealing on foreign exchanges need to deposit TDS on a self-assessed basis before the transaction or whether it is fully the requirement of Schedule VDA self-reporting in the yearly return. This creates a real enforcement gap that the OECD CARF framework, once accepted, will partially fix – but the gap will remain open until at least April 2027.

2. DeFi Yields, Staking and Mining Classification confusion

This income from decentralised finance (DeFi) operations like liquidity providing, yield farming, staking rewards and block rewards from mining do not fit conveniently under the ‘transfer of a VDA’ wording on which the 30% flat rate under Section 115BBH is founded. The IT Act 2025 does not have a separate definition of ‘transfer’ in the VDA context and refers to the general definition under the 1961 Act. Does this mean that staking rewards (which are derived from a validator function and not a sale) are subject to the 30% rate or taxable as income from other sources at slab rates?

The idea that revenue from mining is taxable as business income or income from other sources and not as capital gains on the transfer of a VDA has been referred to in the CBDT guidelines issued in 2022, but the stance has not been formalised in the IT Act 2025. There is no statutory clarity for practitioners and exchange platforms that want to apply automatic tax treatment to certain income categories.

3. Airdrops & Hard Forks: To Receive or Transfer

In the case of airdrop receipts, where a taxpayer receives VDAs without any payment or consideration, the issue is whether the receipt itself is taxable (at slab rates, under ‘income from other sources’) or whether taxation is delayed till the time of eventual transfer. If so, the taxpayer is required to show a fair market value on the date of receipt, which might be especially difficult for new tokens for which there is no established market price.

There is no separate provision in the IT Act 2025 for airdrop taxation. The 2022 Q&A guideline from the CBDT did include gifting scenarios, but did not address the airdrop/hard-fork distinction, leaving a common category of VDA income in regulatory ambiguity.

4. OECD CARF and Automatic Exchange of Information

India has committed to implementing by April 2027 the Crypto-Asset Reporting Framework (CARF) designed by the OECD — under which certain designated reporting firms (crypto exchanges and wallet providers) are required to automatically share user transaction data with tax authorities of relevant jurisdictions. The domestic infrastructure for the execution of CARF is already in place with Section 509(1) of the IT Act 2025 which compels designated reporting companies to send crypto-asset transaction statements to the income tax department.

Once CARF is operational, transaction data of Indian residents utilising overseas platforms will be immediately shared with Indian tax authorities, closing the enforcement gap in offshore exchange activities detailed above. Indian taxpayers who have not declared offshore crypto gains should treat the CARF adoption timeline as a hard deadline for voluntary disclosure and regularisation: the penalty for non-disclosure under Section 270A is between 50% and 200% of the tax on under-reported income, significantly higher than the 30% tax itself.

A Practical Guide for Taxpayers and Advisers

• Keep a full record of all VDA purchases, sales and receipts, transaction-wise, including timestamps, exchange names, wallet addresses and INR equivalent amounts on each transaction date.
• When calculating the Schedule VDA disclosure gains must not be netted off against losses across different VDAs, and each transaction must be disclosed separately. The limitation on loss set-off applies even within the same asset class.
• Taxpayers making trades through foreign exchanges are required to file Schedule VDA with offshore transactions and pay the tax amount willingly in the annual return. The non-deduction of TDS by a foreign exchange does not imply that there is a legal reason for not disclosing.
• Clients obtaining staking incentives, mining income, or airdrops must keep contemporaneous records of the date of receipt and fair market value. A conservative approach of categorising such receipts as ‘income from other sources’ at the time of receipt, with a flag on the position is preferable till the CBDT comes out with a definite guideline on categorisation.
• Start your CARF compliance preparation now. VDA platform providers catering to Indian users should benchmark their reporting infrastructure and data architecture against the CARF standard and be ready well before April 2027.

Conclusion

The Income Tax Act 2025 provides statutory continuity and a modest increase of definitions for the VDA tax scheme, but it falls short of resolving the most serious practical difficulties facing Indian crypto taxpayers, particularly those with cross-border exposure. Once implemented, the OECD CARF framework would dramatically change the enforcement landscape – voluntary disclosure of offshore crypto revenue that may have been missed will be a historical record rather than an option.

For practitioners advising clients, there is a critical window of opportunity between now and April 2027. The IT Act 2025 has widened the scope of VDA, enhanced the reporting responsibilities and kept the strict penalties for non-disclosure. The message is clear: proactive disclosure, comprehensive recordkeeping and CARF-readiness are not just best practices – they are risk management imperatives in the post-2025 Act environment.

References

• Income Tax Act, 2026 (IT No. 2 of 2026) Presidential assent on 21 August 2026 Effective 1 April 2027
• Finance Act 2022 – Insertion of sections 115BBH and 194S in the Income Tax Act, 1961 (Effective from 1 April 2022)
• Finance Act 2025 – VDA definition should include “crypto-asset” as sub-clause (d) with effect from 1 April 2026.
• Income Tax Rules, 2026- as notified by CBDT on 20.03.2026.
• CBDT FAQ on Transition from Income Tax Act 1961 to Income Tax Act 2025 – TDS applicable law & section mapping.
• OECD, Crypto-Asset Reporting Framework (CARF), OECD, Paris, 2022.
• Patron Accounting, ‘Crypto & VDA Tax 2026: Section 115BBH (30%) & TDS’, April 2026.
• TaxClue, ‘Crypto Tax India 2025–26 — 30% VDA Tax, TDS, Schedule VDA ITR’.
• DisyTax, ‘Crypto Taxation in India: Latest Rules, TDS & Tax Guide 2026’, May 2026.
• India VDA Tax & TDS Regime | Income-tax Act 115BBH and 194S – CryptoSlate. June 2026.
• Prevention of Money Laundering Act, 2002 (PMLA) Registration of Virtual Asset Service Providers; 97 platforms registered to December 2024.