India has established one of the world’s most explicit and strictly enforced cryptocurrency tax regimes, introducing it through the Finance Act, 2022. The Finance Act inserted clause (47A) into Section 2 of the Income Tax Act, 1961, defining a Virtual Digital Asset (VDA) in broad, technology-neutral terms that encompass cryptocurrencies, NFTs, and other blockchain-based tokens with economic value.
The definition explicitly excludes the Reserve Bank of India’s digital currency (CBDC), thereby distinguishing private crypto assets from the sovereign digital currency. This definitional framework was deliberate: India has chosen to tax digital assets without recognising them as currency, and the VDA classification achieves that by treating crypto as a distinct category of taxable property.
The cornerstone of the Indian crypto tax regime is Section 115BBH of the Income Tax Act, which imposes a flat 30% tax on income arising from the transfer of any VDA.
Capital Gains Tax Rules
Under Section 115BBH, the 30% tax on VDA income operates as a self-contained charging provision that overrides the conventional capital gains framework under Sections 45 to 55 of the Income Tax Act.
The term “transfer” is interpreted broadly under Section 2(47) of the Act and includes the sale of cryptocurrency for fiat currency, exchange of one crypto asset for another, barter transactions, use of crypto as consideration for goods or services, and gifting of VDAs.
Each of these events constitutes a taxable transfer that triggers the 30% liability.
How CGT is calculated
For each transfer, the taxable income is the consideration received (the sale price or the fair market value of goods or crypto received) less the cost of acquisition of the VDA transferred. No other deductions are permitted. This means that transaction costs, brokerage fees, withdrawal fees, and operating costs are all excluded from the calculation.
If an individual exchanges Bitcoin for Ethereum, the exchange is treated as a disposal of Bitcoin for which the 30% rate applies to the difference between the fair market value of the Ethereum received and the original cost of the Bitcoin.
The absence of any loss offset mechanism is a defining and controversial feature of the Indian regime. If a taxpayer makes a gain on one crypto trade and a loss on another in the same tax year, the loss cannot be used to reduce the taxable gain. Each profitable transaction is taxed at 30% without regard to the overall portfolio performance.
There is also no distinction between short-term and long-term gains, the 30% rate applies regardless of the holding period.
Record keeping
Taxpayers must maintain detailed records of all VDA transactions, including the date of acquisition, the cost of acquisition in Indian rupees (INR), the date of disposal, and the consideration received (also in INR).
Where transactions are conducted in foreign currency or in crypto-to-crypto form, valuation at fair market value in INR on the date of each transaction is required. Given the 1% TDS under Section 194S, which is reported by exchanges and reflected in the taxpayer’s Form 26AS (annual tax statement), the Income Tax Department has substantial transaction data against which self-reported income is automatically cross-referenced.
Income Tax Rules
While Section 115BBH is the primary charging provision for VDA transfers, receipts of crypto that do not constitute a “transfer” in the technical sense are taxed under other heads of income. Cryptocurrency received as payment for employment or professional services is taxed as income from salary or business and profession, respectively, at the applicable rate for that taxpayer’s income bracket.
The fair market value of the crypto in INR at the time of receipt is the taxable amount under that head, and its subsequent transfer gives rise to an additional 30% VDA tax on any further appreciation.
The Finance Act, 2022 and subsequent guidance have not definitively classified VDA income as either capital gains or business income; this ambiguity means that taxpayers must elect an appropriate treatment in their return and defend that election if questioned.
For most individual investors, the 30% rate under Section 115BBH applies as a standalone provision that supersedes this classification question in practice. Businesses and frequent traders may alternatively be subject to the general business income provisions, though the 30% rate under Section 115BBH still applies to the disposal gains on VDA transfers.
Mining and Staking Treatment
Mining
Mining income in India is taxable at the time cryptocurrency is generated, with the fair market value of the mined cryptocurrency in INR at the time of receipt constituting income under the head “income from other sources” (or business income, depending on the scale of operation).
The cost of acquisition of mined crypto for the purposes of Section 115BBH is explicitly treated as zero, the Income Tax Department has confirmed that no costs of mining (electricity, hardware, or otherwise) can be included in the cost of acquisition. This is a significant restriction: miners cannot deduct the costs of generating the income from the subsequent disposal tax.
When mined crypto is later transferred, the full market value received constitutes the disposal consideration, and the 30% tax applies on that amount (since cost of acquisition is zero).
This means the same value may effectively be taxed twice: once as income at mining and once as the full proceeds on disposal. Taxpayers engaged in mining at a significant commercial scale may benefit from the business income classification, under which operating costs are deductible against business profit, though the subsequent disposal of business stock is still subject to Section 115BBH.
Staking
Staking rewards and airdrops are treated as income in India at the time of receipt, with the fair market value in INR at the date of receipt constituting taxable income.
As with mining, the most likely classification is income from other sources, unless the staking activity constitutes a business. No expense deduction is available for non-business staking activities. When the staking rewards are subsequently transferred, the 30% Section 115BBH tax applies to the disposal proceeds, with the cost of acquisition being the value at which the rewards were originally taxed as income.
NFT Taxation
Non-fungible tokens fall within the definition of Virtual Digital Assets under Section 2(47A) of the Income Tax Act, and are subject to the full 30% tax regime under Section 115BBH upon transfer.
The sale of an NFT for fiat currency or its exchange for another crypto asset or NFT constitutes a transfer, and the taxable income is the consideration received less the cost of acquisition (typically the original purchase price or creation cost). No deductions beyond cost of acquisition are permitted.
Where an individual creates and sells NFTs as part of a business activity, the income from NFT sales may constitute business income taxable at the individual’s applicable rate under the standard income tax provisions, while any appreciation on the NFT between creation and sale remains subject to Section 115BBH on the disposal.
The 1% TDS under Section 194S applies to NFT transactions in the same way as other VDA transfers, ensuring that the Income Tax Department receives reporting data from exchanges and marketplaces facilitating NFT sales.
Reporting Requirements
Crypto income must be reported in the annual income tax return using the dedicated Schedule VDA, which was introduced to capture VDA transaction data. Taxpayers must disclose, for each transfer: the nature of the VDA (cryptocurrency, NFT, or other), the date and cost of acquisition, the date and consideration received on disposal, and the resulting taxable income.
The 30% tax liability is calculated directly on the Schedule VDA and feeds into the main tax calculation. ITR-2 (for individuals without business income) and ITR-3 (for individuals with business income) are the appropriate return forms for VDA reporting.
The 1% TDS deducted on each VDA transaction under Section 194S is reflected in Form 26AS and the Annual Information Statement (AIS) issued by the Income Tax Department. The Department uses this data to cross-reference declared VDA income against TDS records; mismatches between the two are likely to trigger scrutiny notices. Taxpayers should ensure that all transactions reported in Schedule VDA are consistent with the TDS data reflected in their Form 26AS.
All amounts must be expressed in Indian rupees, converted at the fair market value in INR on the date of each transaction. The requirement to maintain transaction records, including exchange statements, wallet histories, and conversion calculations, is both a legal obligation and a practical necessity given the TDS cross-matching system.
Records should be retained for a minimum of seven years, consistent with the general assessment limitation period under Indian income tax law.
Penalties
India’s penalty regime for non-compliance with VDA tax obligations is both automatic and significant. Under Section 194S, failure to deduct TDS by an exchange or broker makes that party an “assessee in default,” attracting interest at 1% per month on the undeducted amount from the date the tax should have been deducted, and at 1.5% per month from the date of deduction to the date of deposit if deducted but not deposited.
Failure to file TDS statements attracts fees under Section 234E at INR 200 per day of default, plus penalties under Section 271H ranging from INR 10,000 to INR 1,00,000.
For taxpayers who fail to report VDA income or under-report gains, penalty under Section 271(1)(c) applies at 100% to 300% of the tax evaded in cases of concealment or furnishing inaccurate particulars.
Wilful evasion can result in prosecution under Section 276C of the Income Tax Act, with potential imprisonment of up to seven years. Given the TDS infrastructure and the automatic data-matching through Form 26AS and AIS, the detection risk for unreported VDA income is high.
Taxpayers who have failed to comply with VDA reporting obligations should consider voluntary disclosure through the income tax update return mechanism, which allows corrections to prior-year returns within a specified period on payment of an additional tax.
