Crypto and Tax: Understanding the Legal Grey Areas
- Ashutosh Pathak
- Sep 14
- 6 min read
Since Budget 2022 India has created a specific tax framework for cryptocurrencies and other “virtual digital assets” (VDAs). The tax rules are mostly clear on how gains are taxed (flat 30%, limited deductions, 1% TDS on transfers) but the bigger legal/regulatory questions (how/when VDAs are regulated, banking access, broader consumer protection) remain contested and fluid.
1. The Statutory Pillars
Definition (what counts as a VDA). The Income-tax Act now defines “virtual digital asset” (VDA) in Section 2(47A) to include cryptocurrencies, NFTs and other digital tokens (with power to the Government to exclude certain items).
Flat tax on transfers of VDAs — Section 115BBH. Income from the transfer of a VDA is taxed under a special provision (Section 115BBH) by a flat 30% (plus applicable surcharge and 4% health & education cess) and certain special computation rules apply.
TDS (withholding) on transfers — Section 194S. The buyer/payer (and certain intermediaries) must generally deduct 1% TDS at the time of payment/credit for transfers of VDAs. TDS becomes applicable once aggregate consideration in a financial year exceeds ₹10,000 (or ₹50,000 for certain “specified persons” — see the rules). If PAN is not furnished higher withholding (as per general TDS rules) can apply.
Exclusions / clarifications by Government. The CBDT issued notifications that exclude certain digital records (gift-cards, vouchers, mileage/reward points, subscription credits and certain NFTs that transfer enforceable ownership of underlying tangible assets) from the VDA definition. That keeps routine loyalty points/subscriptions outside VDAs.
2. How the tax works in practice — key rules and their consequences
How the taxable amount is computed: Under Section 115BBH the taxable income from a transfer = sale consideration − cost of acquisition (only cost of acquisition is allowed as deduction). No other expenses (brokerage/gas/other overheads) are deductible for the purpose of computing income under 115BBH. The tax payable on that income is 30% + surcharge (as applicable) + 4% cess.
Losses and set-off: Losses from transfers of VDAs are not allowed to be set off against income computed under other provisions of the Income-tax Act and (subject to the exact statutory language) losses generally cannot be carried forward except intra-VDA set-offs as interpreted in practice. (See discussion below and consult a tax adviser for transaction-by-transaction strategy.)
Non-transfer receipts (airdrops, mining, staking, salary in crypto): Tokens received for nil or inadequate consideration (airdrops/gifts) may be taxable in the hands of recipient under Section 56(2) if value exceeds ₹50,000 (regular slab rates apply). Mining/staking/received tokens that are rewards are typically taxed when received (at fair market value) under business income / other sources (slab rates) and if later sold are taxed again under 115BBH on the capital gain — effectively creating two taxable events (receipt taxed at slab rate, disposal taxed at 30% with the earlier taxed value forming cost of acquisition). Many practitioners treat mining/staking as business income where appropriate.
3. Reporting, withholding and return filing — the paperwork side
TDS obligations / forms: Guidance and a TDS-tutorial from the Income Tax Department explain mechanics, thresholds, and reporting forms (including specific reporting requirements for exchanges and brokers). Exchanges and platforms are required to report transaction/broker details in the prescribed forms where TDS is involved.
Where to declare on your ITR: The Income-tax e-filing portal includes a dedicated “Schedule VDA” in ITR-2 and ITR-3 (and guidance materials) where taxpayers must disclose VDA transactions transaction-wise. Failing to disclose VDA transactions may trigger notices.
4. Selected judicial / administrative developments
ITAT (important ruling): The Income-tax Appellate Tribunal (Jodhpur bench) in Raunaq Prakash Jain v. ITO held that cryptocurrencies can be capital assets and gains prior to the 2022 amendments may be taxable as capital gains — a helpful precedent for certain pre-2022 transactions. This line of tribunal rulings has been used by taxpayers to argue capital-gains character in many cases.
Supreme Court & regulatory policy: The Supreme Court in Internet & Mobile Association of India v. RBI (2020) struck down the RBI banking restriction (banks had been told not to service crypto firms), which reopened banking access for exchanges. Recently (2025) the Supreme Court has emphasized that policy/regulatory decisions for crypto are for the legislature/executive to make, not the courts — i.e., courts are reluctant to draft a regulatory code; the Government remains the principal actor.
5. GST: the “second layer” of tax
Short answer: GST is generally applied to services provided by crypto platforms/exchanges (commissions, trading fees, subscription or other service charges), and many exchanges now charge 18% GST on fees. Whether GST applies on the sale/purchase of the token itself (as supply of goods or services) has been debated; practice (and recent enforcement action) shows Indian exchanges charging GST on service components and some offshore platforms also collecting GST for Indian users. Expect disputes and further clarifications from CBIC/ GST Council.
6. Enforcement & government action — why compliance matters
The CBDT and income tax authorities have actively started issuing notices and conducting surveys/assessments in VDA space; media reports show seizure/search actions and notice campaigns aimed at undeclared crypto income. The TDS mechanism is explicitly designed to improve traceability of transactions. Non-compliance risks interest, penalties, and prosecution in serious evasion cases.
7. Practical guide — what every Indian crypto user should do (step-by-step)
Maintain an auditable ledger (export exchange CSVs, wallet transaction history, timestamps, on-chain tx IDs, and INR value at time of each receipt/payment). If bought in USD or other currencies, note exchange-rate and source used for INR conversion.
Report accurately on Schedule VDA in your ITR-2/3 and reconcile TDS certificates (Form 26AS / Form 26Q/26QE entries) — claim the TDS credit for amounts actually deducted. (If TDS was wrongly deducted by an exchange, preserve communications.)
Classify receipts correctly: Airdrops/mining/staking → record FMV on date received (this is often treated as taxable on receipt); salary in crypto → treat as salary (withholding obligations for employer); sales/swaps → treat as transfers under 115BBH.
Mind the TDS thresholds: if you buy or otherwise are the “payer” and aggregate payments to a resident in a FY exceed thresholds (₹10k / ₹50k depending on status), you may have to deduct 1% TDS. Exchanges usually do this automatically for on-platform trades — check and retain TDS certificates.
Use the right ITR form & disclose transaction-wise in Schedule VDA. If you are a trader doing frequent transactions consider whether gains are business income (ITR-3) vs. capital gains (ITR-2); this classification affects other deductions and compliance.
If you received tokens earlier than FY 2022-23, check the recent tribunal judgments (some benches held pre-2022 gains could be capital gains) and keep documents; but remember statutory 115BBH applies for gains arising on/after 1-Apr-2022.
When in doubt, get an advance ruling or a CA/ tax lawyer’s written opinion before litigating — the space is fact-sensitive (mining vs. trading vs. receipt as gift) and the right classification matters for tax rates and deductibility.
8. Short worked example
You buy 1 BTC on 10-Jan for ₹1,000,000 and sell it on 15-Aug for ₹1,500,000.
Sale consideration = ₹1,500,000.
Cost of acquisition = ₹1,000,000.
Taxable gain under Section 115BBH = ₹1,500,000 − ₹1,000,000 = ₹500,000.
Income-tax at 30% on ₹500,000 = ₹150,000.
Health & Education cess @4% on tax = 4% of ₹150,000 = ₹6,000.
Total tax payable = ₹150,000 + ₹6,000 = ₹156,000 (plus any applicable surcharge depending on your total income).
If 1% TDS was deducted at sale by the exchange on ₹1,500,000 then TDS = ₹15,000 and you can claim that as TDS credit while paying the balance tax or getting a refund, as applicable. (All numeric steps shown above.)
9. Open questions and grey areas (why this still feels like “grey” law)
Regulation vs. taxation split: India has made taxation explicit while leaving broader regulatory answers (licensing, AML, stablecoin treatment, bank access rules) to policy-making bodies. Courts have declined to craft a regulatory framework, leaving policy to the executive and Parliament. That dichotomy — clear tax rules but uncertain commercial/regulatory rules — is a major source of legal grey.
GST scope: whether the token itself is a good/service attracting GST in addition to the exchange service fee remains litigated in some contexts; in practice exchanges charge 18% GST on platform fees and several offshore platforms have started collecting GST for Indian users. Expect further CBIC/GST Council guidance.
Characterization of complex DeFi transactions: swaps, liquidity-pool shares, wrapped tokens, and on-chain composability create transactions that are hard to classify cleanly into “transfer” or “receipt” for 115BBH and for GST — technical and valuation issues will continue to generate disputes.
💡 *Vidhigyata Insight* :
India’s approach to cryptocurrency taxation is unambiguous—tax first, regulate later. Sections 115BBH and 194S of the Income-tax Act, 1961 impose a flat 30% tax and 1% TDS on Virtual Digital Asset transfers, while CBDT notifications carve out limited exclusions. Yet, beyond taxation, no comprehensive regulatory law governs crypto trading, stablecoins, or DeFi. The Supreme Court’s 2020 IAMAI v. RBI ruling reopened banking access but left policy-making to the legislature. Until a full regulatory framework emerges, crypto users must treat the tax regime as settled, maintain meticulous records, and seek professional advice to avoid penalties and litigation.
Key Sources:
Income-tax Act 1961: §115BBH, §194S, §2(47A) – tax on Virtual Digital Assets.
CBDT Notifications 74/2022 & 75/2022 – VDA/NFT exclusions.
Internet & Mobile Association of India v. RBI (2020) 10 SCC 274
ITAT Raunaq Prakash Jain v. ITO
CBDT TDS guidance & ITR “Schedule VDA” instructions.
GST updates: 18 % on exchange/platform service fees (CBIC circulars, industry notes).
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