Introduction: Why Crypto Taxation Matters More Than Ever
India ranks among the top countries in the world for cryptocurrency adoption. According to various industry reports, millions of Indians have invested in Bitcoin, Ethereum, and other digital assets over the past few years. Despite the popularity, crypto taxation remained poorly understood — until the Finance Act, 2022 introduced a formal framework.
The Income Tax Act, 2025, which comes into effect from 1st April 2026, retains and strengthens this framework. The core rules — 30% flat tax, no loss set-off, 1% TDS — stay intact. But there is one significant tightening: the TDS threshold has been removed entirely under the new Act. Even a transaction of ₹1 will now attract TDS.
In this sixth blog of our Income Tax Act 2025 series, we break down every aspect of VDA (Virtual Digital Asset) taxation in simple language — covering the definition, tax rates, computation, TDS changes, gift taxation, mining rewards, and what the new Act means for you from 1st April 2026.
Important: The core tax rate (30%) and the no-loss-set-off rule remain unchanged. The major change under the new Act is the complete removal of TDS thresholds — every crypto transaction, regardless of size, now attracts 1% TDS from the very first rupee.
1. What Is a Virtual Digital Asset (VDA)?
The term Virtual Digital Asset (VDA) was formally introduced into Indian tax law by the Finance Act, 2022 through Section 2(47A) of the Income Tax Act, 1961. Under the new Income Tax Act, 2025, the definition is carried forward under Section 2(111) with a broader scope to reduce disputes involving newer digital assets.
1.1 The Legal Definition (Section 2(111) of Income Tax Act, 2025)
A VDA is defined as:
• Any information, code, number, or token (other than Indian currency or foreign currency) generated through cryptographic means or otherwise, by any name, providing a digital representation of value that can be transferred, stored, or traded electronically.
• A Non-Fungible Token (NFT) or any other token of a similar nature.
• Any other digital asset as specified by the Central Government through a notification in the Official Gazette.
In plain language: Bitcoin, Ethereum, Litecoin, Dogecoin, Ripple, Matic, Solana, and essentially all traded cryptocurrencies and NFTs fall under VDA. The Central Government has the power to add or exclude assets from this definition.
1.2 What Is NOT a VDA?
The following are specifically excluded from the VDA definition:
Excluded from VDA Definition | Reason / Authority |
Indian Currency (Rupee) | Legal tender — excluded by definition |
Foreign Currency (USD, EUR etc.) | Regulated as foreign exchange — excluded by definition |
Gift Cards and Vouchers | Not an investment asset — excluded by Notification No. 74/2022 |
Mileage Points / Reward Points / Loyalty Points used for goods/services | Non-financial use case — excluded by Notification No. 74/2022 |
NFT whose transfer results in ownership of an underlying physical (tangible) asset | Transfer of tangible property, not digital asset — excluded by Notification No. 75/2022 |
Central Bank Digital Currency (CBDC / e-Rupee issued by RBI) | Issued by central bank — treated as legal tender, not VDA |
Key takeaway: The RBI's digital rupee (e-Rupee / CBDC) is NOT a VDA. It is treated as legal tender — just like physical currency. Transactions in e-Rupee are taxed normally, not at the 30% VDA rate.
2. How Is VDA Income Taxed? The 30% Rule
Income arising from the transfer of any Virtual Digital Asset is taxed at a flat rate of 30% under the Income Tax Act. This rate is the same regardless of:
• How long you held the asset (no distinction between short-term and long-term)
• Your income tax slab (even if you are in the 5% or 0% slab, VDA income is taxed at 30%)
• Whether the VDA income is classified as capital gains or business income
On top of the 30% income tax, a Health and Education Cess of 4% is applicable, making the effective total tax rate 31.2%.
2.1 How to Calculate VDA Tax
The computation is straightforward:
Taxable VDA Income = Sale Consideration – Cost of Acquisition
Tax Payable = Taxable VDA Income × 30% + 4% Cess
Example: You bought Bitcoin for ₹2,00,000 and sold it for ₹3,50,000. Your taxable income = ₹1,50,000. Tax = ₹1,50,000 × 30% = ₹45,000. Add 4% cess = ₹45,000 + ₹1,800 = ₹46,800 total tax payable.
2.2 What Can You Deduct?
Only the cost of acquisition is allowed as a deduction. Nothing else. The following cannot be claimed as deductions:
• Exchange transaction fees or brokerage
• Mining costs (electricity, hardware depreciation)
• Advisory or CA fees for crypto tax filing
• Internet charges
• Any other expenditure related to the VDA transaction
Warning: Many crypto investors mistakenly assume they can claim exchange fees as a deduction. This is NOT permitted. The Income Tax Act 2025 explicitly allows only the cost of acquisition as a deduction from VDA income.
3. The Loss Set-Off Prohibition — A Critical Rule
One of the harshest features of VDA taxation is the complete prohibition on loss set-off and carry-forward. Here is how it works:
• If you make a loss on selling Bitcoin, you CANNOT set it off against your salary income.
• If you make a loss on selling Ethereum, you CANNOT set it off against profit from selling another cryptocurrency.
• If you make a loss in Tax Year 2026-27, you CANNOT carry it forward to offset against VDA gains in Tax Year 2027-28.
This means VDA income is completely ring-fenced and isolated from all other income. Each profitable VDA transaction stands on its own for tax purposes.
Example: You earn ₹2 lakh profit from Bitcoin and ₹1 lakh loss from Ethereum in the same year. Under normal rules, you would pay tax on ₹1 lakh net. But under VDA rules, you pay 30% tax on the full ₹2 lakh Bitcoin profit. The ₹1 lakh Ethereum loss is simply lost for tax purposes.
4. Tax Treatment by Transaction Type — Complete Reference
Transaction Type | Tax Treatment | Rate / Head |
Profit from sale/transfer of crypto / NFT | Taxable | 30% flat + 4% cess = 31.2% effective |
Crypto-to-crypto swap (e.g. BTC to ETH) | Taxable as transfer | 30% on profit; each swap is a taxable event |
Loss from VDA transfer | Cannot be set off | Not allowed against any other income or VDA gain |
Loss carry forward to next year | NOT allowed | VDA losses cannot be carried forward |
Crypto received as gift (from non-relative) > ₹50,000 | Taxable at slab rate | Section 193(2)(x) — Income from Other Sources |
Crypto received as gift (from specified relative) | Exempt | Section 193(2)(x) — gift exemption applies |
Mining / staking rewards / airdrops (on receipt) | Taxable at slab rate | Fair market value on date of receipt |
Sale of mined/staked crypto (later) | 30% on gain | Cost = FMV at time of receipt used as acquisition cost |
Cost of acquisition of VDA | Deductible | Only purchase cost — no other deductions allowed |
Transaction fees paid to exchange | NOT deductible | Cannot be claimed as deduction under 30% regime |
Indexation benefit on VDA | NOT available | No indexation; flat 30% regardless of holding period |
5. TDS on VDA Transactions — The Big Change in the New Act
Tax Deducted at Source (TDS) is the government's mechanism to track crypto transactions in real time. Under the old Act (Section 194S), TDS of 1% was applicable only above a specified threshold. The Income Tax Act, 2025 makes a major change: the threshold is completely removed.
Aspect | Old Act (Section 194S) | New Act (Section 393, Table 1, Sl. No. 8(vi)) |
TDS Rate | 1% of consideration | 1% of consideration (unchanged) |
Threshold – Specified Person* | ₹50,000 per financial year | NO THRESHOLD – TDS from first rupee |
Threshold – Other persons | ₹10,000 per financial year | NO THRESHOLD – TDS from first rupee |
Scope | Transfer of VDA by individual/HUF meeting criteria | All transfers – exchanges, brokers, platforms all covered |
Responsibility | Buyer / platform (with CBDT guidelines) | Widened – exchanges, facilitators, intermediaries explicitly covered |
Barter/crypto-to-crypto TDS | Tax must be paid before releasing consideration | Retained – must be deposited before releasing asset |
Form for quarterly reporting by exchanges | Form 26QF | Continued |
Exemption for specified person making payment | Exempt from Section 203A and 206AB | Retained |
What this means practically: Even if you are a small investor buying ₹500 worth of Bitcoin on an exchange, the exchange must deduct ₹5 (1% of ₹500) as TDS before crediting your account. This TDS can be claimed as a credit in your annual income tax return (ITR), so it is not an additional cost — but it does add compliance complexity for platforms.
5.1 Who Deducts TDS?
The responsibility for TDS deduction falls on:
• The buyer (if purchasing directly from another person)
• The cryptocurrency exchange or trading platform (if the transaction is through an exchange)
• The broker (if a broker facilitates the transaction — the exchange and broker can agree via Form 26QF on who deducts)
5.2 Crypto-to-Crypto Swap and TDS
When you swap one cryptocurrency for another (e.g., converting Bitcoin to Ethereum), both transactions are treated as transfers and TDS applies. Since no fiat (cash) changes hands in a swap, the law requires that TDS must be deposited before the assets are released. Exchanges typically handle this automatically by reducing the consideration accordingly.
Compliance tip: If you use international crypto exchanges that are not registered in India, TDS obligations still apply. You as the buyer must ensure TDS compliance. Failure to deduct or deposit TDS can result in penalties under the Income Tax Act.
6. Crypto Gifts, Airdrops, Mining Rewards — How Are They Taxed?
6.1 Receiving Crypto as a Gift
If you receive cryptocurrency as a gift, it is taxable under Section 193(2)(x) of the new Act (equivalent to old Section 56(2)(x)) as Income from Other Sources. The rules are:
• Gift from a relative (as defined in the Act — spouse, siblings, parents, etc.): Fully exempt.
• Gift on special occasions (marriage, inheritance, will): Fully exempt.
• Gift from a non-relative if total gifts in a year exceed ₹50,000: The entire fair market value (FMV) of the crypto on the date of receipt is taxable at your applicable income slab rate.
• Gift from a non-relative up to ₹50,000 total in a year: Exempt.
Important: Gifts of crypto are taxed at normal slab rates, not at the 30% VDA flat rate. The 30% rate applies only when you later transfer (sell) the gifted crypto.
6.2 Mining Rewards, Staking Rewards, Airdrops
Coins or tokens received through mining, staking, or airdrops are treated as income at the time of receipt. They are taxed at your applicable income slab rate based on their fair market value on the date of receipt. When you later sell these coins, the FMV at the time of receipt becomes your cost of acquisition, and the subsequent gain is taxed at 30%.
Two-stage taxation for mined crypto: Stage 1 — On receipt: Taxed at slab rates on fair market value. Stage 2 — On sale: 30% tax on the difference between sale price and FMV at receipt (which is the acquisition cost).
7. Section Mapping: Old Act (1961) vs. New Act (2025)
Provision / Subject | Old Act Section (1961) | New Act Section (2025) |
Definition of Virtual Digital Asset | Section 2(47A) | Section 2(111) |
Tax on income from VDA transfer | Section 115BBH | Section 158 (Schedule) |
TDS on VDA transfer | Section 194S | Section 393(1), Table 1, Sl. No. 8(vi) |
Gift of VDA (taxability in recipient's hands) | Section 56(2)(x) | Section 193(2)(x) |
Schedule VDA in ITR | ITR-2 / ITR-3 Schedule VDA | Continued; form numbers to be updated |
Power to exclude digital assets from VDA | Section 2(47A) Proviso | Section 2(111) Proviso |
8. Complete Comparison: Pre-2022, Old Act & New Act 2025
Aspect | Pre-2022 (Before Finance Act 2022) | Finance Act 2022 → New Act 2025 |
Legal Status | No specific provision — treated as capital asset or business income case-by-case | Formally defined as VDA under Section 2(47A) / Section 2(111) |
Tax Rate | Varied — LTCG / STCG / slab rate depending on classification | Flat 30% regardless of holding period or nature |
Loss Set-off | Could offset against other capital gains in some cases | Strictly prohibited — no set-off, no carry forward |
TDS | No specific TDS provision | 1% TDS under Section 194S / Section 393 |
Deductions | Some expenses could be claimed | Only cost of acquisition; no other deductions |
Gifts | Unclear treatment | Taxable at slab rate in recipient's hands if from non-relative |
Threshold for TDS | Not applicable | Old: ₹10,000/₹50,000; New 2025 Act: Zero — first rupee onward |
GST on exchange fees | Ambiguous | 18% GST on platform/exchange service fees (effective July 2025) |
9. GST on Crypto Exchange Fees — A New Development (July 2025)
Starting July 2025, the Central Board of Indirect Taxes and Customs (CBIC) clarified that all service fees charged by cryptocurrency exchanges — including spot trading fees, margin trading fees, and withdrawal charges — are taxable services under GST at 18%.
This means: Every time you pay a trading fee to a crypto exchange, you are paying 18% GST on that fee. This is indirect tax on the service, not on the crypto asset itself. The actual crypto transaction (buying and selling) does not attract GST.
• GST is charged by the exchange on the service fee only.
• The crypto asset itself is not subject to GST.
• GST paid on fees is not deductible from VDA income for income tax purposes.
Practical impact: If you pay ₹1,000 as exchange fees in a year, you also pay ₹180 GST on those fees. Neither amount is deductible from your VDA income for income tax computation.
10. How to Report VDA Income in Your Income Tax Return
Taxpayer Category | Applicable ITR Form | Schedule to Use |
Individual / HUF – VDA as investment (Capital Gains) | ITR-2 | Schedule VDA |
Individual / HUF – VDA as business / frequent trading | ITR-3 | Schedule VDA + Business Schedule |
Company / Firm / LLP | ITR-6 / ITR-5 | Schedule VDA |
Partnership Firm | ITR-5 | Schedule VDA |
10.1 Annual Information Statement (AIS) Tracking
All VDA transactions above the TDS threshold (and now, under the new Act, all transactions) are automatically reported to the Income Tax Department through the Annual Information Statement (AIS). The income tax department receives this data directly from crypto exchanges registered in India.
This means: Even if you forget to declare your crypto income, the department already has a record of your transactions. Non-reporting can lead to notices, penalties, and interest under the Income Tax Act.
Important: The Income Tax Department has issued notices to several taxpayers for under-reporting or non-reporting of VDA income. If you have received such a notice, do not panic — consult your CA immediately. You can file a revised or belated ITR to correct the omission.
11. Action Checklist: What Every Crypto Investor Must Do
• Maintain a detailed transaction log: Date of purchase, purchase price, date of sale, sale price, exchange fees — for every single transaction.
• Do not mix cost of acquisition with exchange fees: Keep them separate since only acquisition cost is deductible.
• Track TDS credits: Ensure all 1% TDS deducted by exchanges appears in your Form 26AS or AIS before filing ITR.
• Report all VDA income in ITR — even losses: Losses must be reported even though they cannot be set off. Non-reporting is a compliance risk.
• Use the correct ITR form: ITR-2 for investment-type gains; ITR-3 if you are a frequent trader reporting as business income.
• Report mining/staking rewards on receipt: Do not wait until you sell — the income arises when you receive the tokens.
• If you received crypto as a gift: Determine whether it is from a relative or non-relative, and the FMV on the date of receipt.
• Consult a CA for foreign crypto holdings: If you hold VDAs on foreign exchanges, additional reporting under Black Money Act and FEMA may apply.
• Keep track of your exchange's GST invoices: 18% GST on fees is a cost you should track even though it is not deductible for income tax.
Reminder: Crypto trading in India is fully legal. The government has chosen to regulate it through taxation — not ban it. The high tax rate and strict compliance rules are not obstacles; they are the framework within which you can participate safely.
12. Conclusion
The Income Tax Act, 2025 does not reinvent VDA taxation — it reinforces it. The 30% flat rate, the no-loss-set-off rule, and the 1% TDS have been in place since April 2022. What changes from 1st April 2026 is the complete removal of TDS thresholds, making every single crypto transaction — no matter how small — subject to TDS.
For casual investors, this means greater compliance discipline. For active traders and businesses dealing in crypto, it means stricter record-keeping and higher TDS obligations. For everyone, it means the taxman already knows about your crypto transactions through the AIS — ignoring them is no longer an option.
At Himanshu Majithiya & Co., we assist individuals, traders, and businesses with crypto tax computation, ITR filing under Schedule VDA, TDS compliance, and responses to Income Tax notices related to VDA income. If you need guidance, we are here to help.
About the Author
This blog has been authored by Himanshu Majithiya & Co., Chartered Accountants, Ahmedabad. The firm provides comprehensive services in Income Tax, GST, Company Audit, ROC Compliance, FFMC Compliance (RBI), and AI & Workflow Automation. Contact us at info@himanshumajithiya.com or +91 98795 03465.
Disclaimer: This blog is for educational and informational purposes only. It does not constitute legal, tax, or professional advice. Readers should consult a qualified Chartered Accountant or tax professional before taking any action based on this article. Cryptocurrency investments are subject to market risk. This content has been developed in compliance with the Guidelines for Members of the Institute of Chartered Accountants of India (ICAI).