Cryptocurrency and its Taxation

Cryptocurrency and its Taxation

India taxes all Virtual Digital Assets (VDAs) — including Bitcoin, Ethereum, stablecoins, NFTs, and most governance tokens — at a flat 30% under Section 115BBH of the Income-tax Act 1961. No deductions are allowed beyond cost of acquisition, losses cannot be set off across assets or against other income, and a 1% TDS applies under Section 194S. For Assessment Year 2027-28 (Financial Year 2026-27), every VDA transfer must be reported in Schedule VDA of your ITR, and foreign-exchange holdings must appear in Schedule FA — regardless of whether you sold anything.

What Counts as a Virtual Digital Asset?

Section 2(47A) of the Income-tax Act defines a VDA as any information, code, number, or token — generated through cryptographic means or otherwise — that provides a digital representation of value and can be transferred, stored, or traded electronically. The Central Government can notify additional assets as VDAs by gazette notification.

In scope:

• Cryptocurrencies: Bitcoin (BTC), Ethereum (ETH), Ripple (XRP), Solana (SOL), and stablecoins such as USDT and USDC
• Governance tokens and utility tokens issued on public blockchains
• Non-fungible tokens (NFTs) — each NFT is a separate VDA, and gains on sale are taxed under Section 115BBH
• DeFi (Decentralised Finance) liquidity-pool tokens when transferred outside the pool

Explicitly excluded:

• Indian currency (INR) and foreign currencies as defined under FEMA
• Gift cards, in-game currencies controlled exclusively by the issuer, and loyalty points that cannot be transferred to third parties — these do not cross the cryptographic/tradable threshold

The practical test is straightforward: if the asset is tradable, transferable, and cryptographically generated (or Government-notified), it is a VDA for tax purposes.

Section 115BBH: The 30% Flat Tax — What It Actually Means in Practice

Section 115BBH charges income from the transfer of a VDA at 30%, plus applicable surcharge and a 4% Health and Education Cess. "Transfer" carries the same meaning as under Section 2(47): sale, exchange, relinquishment, extinguishment of rights, or any arrangement under which you cease to hold the asset.

Three rules make this regime uniquely harsh compared to equities or real estate:

1. Only cost of acquisition is deductible. Taxable gain = sale consideration minus cost of acquisition. You cannot deduct exchange fees on the sell side, gas fees paid at the time of transfer, or any other expenditure. Nothing else comes off.

2. No loss set-off, no carry-forward. If you sell Bitcoin at a Rs. 5 lakh loss in January 2027, that loss cannot be set off against your Ethereum gain in March 2027, cannot be set off against your salary or house property income, and cannot be carried forward to FY 2027-28. Each profitable VDA trade stands alone; each losing trade is permanently extinguished.

3. No holding-period distinction. There is no short-term / long-term capital gain concept for VDAs. Held for three days or three years — the rate is 30%. The holding-period strategies that reduce tax on listed equities or debt mutual funds are irrelevant here.

Surcharge for higher incomes: At total income between Rs. 50 lakh and Rs. 1 crore, the surcharge is 10%, taking the effective rate to 33% plus cess. Between Rs. 1 crore and Rs. 2 crore, it is 15%. For most retail crypto traders whose total income falls below Rs. 50 lakh, the effective all-in rate is 31.2% (30% + 4% cess on 30%).

Section 194S: TDS on Every VDA Transfer

Section 194S requires the buyer — or the exchange acting as intermediary — to deduct 1% tax at source on the consideration paid for a VDA transfer, at the time of credit or payment, whichever is earlier.

Threshold for deduction:

Once the threshold is crossed, TDS applies to the entire consideration from that point, not just the excess.

Exchange-routed trades: Indian exchanges handle the mechanics. TDS is deducted per trade, reflected in your 26AS and Annual Information Statement (AIS) within the relevant quarter, and you claim credit while filing your ITR. No manual action is required from you as the seller beyond reconciliation.

Peer-to-peer (P2P) trades: The buyer must deduct and deposit TDS using Form 26QE (for individuals and HUFs) or Form 26Q (for others), within 30 days of the end of the month in which TDS was deducted. Default triggers:

• Interest under Section 201(1A): 1% per month from the date TDS was deductible (failure to deduct) or 1.5% per month from deduction to deposit (deducted but not deposited)
• Penalty under Section 271C: up to the amount of TDS not deducted

For a Rs. 10 lakh P2P trade with a 90-day default: TDS = Rs. 10,000; interest = Rs. 1,500; penalty exposure = up to Rs. 10,000. That Rs. 10,000 TDS default ends up costing Rs. 21,500 minimum — before any litigation.

Consideration in kind: Swapping BTC for ETH is still a VDA transfer. TDS applies on the fair market value (FMV) of the consideration received. The party receiving the coin and paying in another must deposit TDS in cash before or at the time of the exchange.

Worked Example: Ravi's Crypto Portfolio, AY 2027-28

Ravi is a salaried professional earning Rs. 18 lakh per annum. In FY 2026-27, he made the following VDA moves.

Trade 1 — Bitcoin purchase and sale:

• Bought 0.5 BTC on 3 July 2026: Rs. 30,00,000
• Sold 0.5 BTC on 18 February 2027: Rs. 38,00,000
• Exchange deducted TDS under Section 194S: Rs. 38,000 (1% of Rs. 38,00,000)
• Taxable gain = Rs. 38,00,000 – Rs. 30,00,000 = Rs. 8,00,000
• Tax @ 30% = Rs. 2,40,000 | Add 4% cess = Rs. 9,600
• Tax on BTC gain = Rs. 2,49,600

Trade 2 — Ethereum loss:

• Bought 5 ETH at Rs. 2,00,000 each: Rs. 10,00,000 (cost)
• Sold 5 ETH for Rs. 7,00,000 (market fell)
• Loss = Rs. 3,00,000
• This loss cannot be set off against the BTC gain or against Ravi's salary. It disappears.

Trade 3 — MATIC staking rewards:

• Received 2,000 MATIC as staking rewards on 1 November 2026
• FMV on receipt: Rs. 45 per token = Rs. 90,000
• Taxable as Income from Other Sources in FY 2026-27 at Ravi's slab rate (he falls in the 30% bracket): tax Rs. 27,000
• Ravi sold all 2,000 MATIC on 10 March 2027 for Rs. 60,000
• Cost of acquisition = Rs. 90,000 (FMV at receipt)
• Loss on MATIC transfer = Rs. 30,000
• This loss, again, cannot be set off or carried forward.

Ravi's net VDA tax position:

• Section 115BBH tax on BTC: Rs. 2,49,600
• Income from Other Sources (staking): Rs. 27,000
• Less TDS credit (26AS/AIS): Rs. 38,000
• Net tax payable on VDA activity ≈ Rs. 2,38,600

The Rs. 3,30,000 in combined losses (ETH + MATIC) provide zero tax relief. Ravi is taxed as if he only ever won.

Taxing Specific Events Beyond a Simple Buy and Sell

Mining

When you receive cryptocurrency from mining, the cost of acquisition is deemed nil by the Act. There is no income event at the point of receipt — tax arises only when you transfer the mined asset. At that point, the entire sale consideration is your taxable gain under Section 115BBH.

Staking Rewards

Staking rewards are taxed as Income from Other Sources at your applicable slab rate on the date of receipt, at the FMV in INR on that date — not at the 30% flat rate. The FMV at receipt then becomes your cost of acquisition for any future transfer. This creates a layered squeeze: you pay slab-rate tax on the reward, then 30% on any subsequent gain computed from the FMV baseline you were already taxed on.

Airdrops

The tax treatment mirrors staking rewards: Income from Other Sources at FMV on the date of receipt, with FMV on that date becoming your cost of acquisition. Many airdropped tokens have near-zero liquidity on the receipt date — this creates a mismatch where tax is assessed on a notional FMV that may never be realisable.

Gifts of VDA

A VDA received as a gift is taxable in the recipient's hands under Section 56(2)(x) if the aggregate value of gifts from non-relatives exceeds Rs. 50,000 in a financial year. Gifts from relatives as defined in Section 56, or gifts on the occasion of marriage, are exempt. The FMV on the gift date becomes the recipient's cost of acquisition.

The giver must also consider that gifting a VDA constitutes a transfer. While gifts to certain relatives may be exempt, the position for other recipients should be evaluated under the current notification framework before you structure a gift.

Swapping One VDA for Another

Exchanging Bitcoin for Ethereum is a transfer of Bitcoin. The consideration is the FMV of the Ethereum received on the date of exchange. Tax is computed on the BTC gain, and the FMV of ETH received becomes your cost of acquisition for ETH going forward. TDS applies on the FMV of the consideration.

Using VDA to Purchase Goods or Services

Paying for a laptop or a service subscription with crypto is a transfer of the VDA. Taxable gain = FMV of the goods or services received (i.e., the purchase price) minus your cost of acquiring the VDA.

Cost of Acquisition: What Qualifies and What Does Not

The Act permits only cost of acquisition as a deduction. In practice, this means:

Qualifies:

• The actual INR price paid at the time of purchase, including the exchange's buy-side spread baked into the execution price
• Gas or network fees denominated in fiat and paid at the time of acquisition (arguable, but defensible with documentation)
• Directly attributable acquisition costs such as KYC onboarding charges for the specific purchase

Does not qualify:

• Exchange trading fees on the sell side
• Gas fees paid at the time of transfer or sale
• Annual account maintenance fees
• Interest on loans taken to purchase VDA
• Portfolio-tracking software subscriptions

Valuation method: FIFO (First In, First Out) is what most exchanges use for their 26AS / AIS reporting, and it is the default approach the Tax Department's systems expect. Weighted average cost is permissible if applied consistently across all transactions and supported by a detailed ledger. Switching methods year-on-year is a scrutiny red flag — pick one and maintain it across financial years.

Reporting: Schedule VDA and Schedule FA

Schedule VDA in the ITR

From AY 2023-24 onwards, ITR-2 and ITR-3 include a dedicated Schedule VDA where you report:

• Date of acquisition and date of transfer for each VDA
• Cost of acquisition
• Sale consideration
• Computed gain or loss (gains taxed at 30%; losses reported but not set off)

ITR-1 (Sahaj) cannot accommodate VDA income. If you have any VDA transactions during the year — even one — you must file at minimum ITR-2 (salaried individuals without business income) or ITR-3 (if you have business or professional income). Filing ITR-1 when you have VDA transactions results in a defective return notice from the Centralised Processing Centre (CPC).

Schedule FA for Foreign Exchange Holdings

If you hold VDA on a foreign exchange — Binance, Kraken, Coinbase, or any non-Indian platform — and you are a Resident and Ordinarily Resident (ROR) individual, you must disclose those holdings in Schedule FA of your ITR, even if you made no sales during the year. Schedule FA follows the calendar year (1 January to 31 December), not the financial year. Required disclosures include the name and country of the exchange, peak balance during the calendar year, and closing balance on 31 December.

Non-disclosure of foreign VDA holdings is treated as undisclosed foreign income under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. The penalty is three times the undisclosed amount, and prosecution is possible. For Rs. 50 lakh held undisclosed on a foreign exchange, penalty exposure is Rs. 1.5 crore — entirely separate from income-tax liability, interest, and any Section 271 penalties. The Income Tax Department receives data from foreign exchanges under FATCA (Foreign Account Tax Compliance Act) and the CRS (Common Reporting Standard) framework. Assume your foreign holdings are visible.

DTAA Relief, Non-Residents, and the Residency Overlay

India's Double Taxation Avoidance Agreements (DTAAs) typically do not contain VDA-specific articles. The 30% charge under Section 115BBH is neither a "capital gains" rate nor a "business income" rate in the conventional treaty sense — it is a specific domestic provision with its own rules. Treaty protection is therefore generally unavailable against the Section 115BBH levy, even where a DTAA exists between India and the country of your broker or exchange.

Non-Resident Indians (NRIs) are taxed only on India-sourced VDA income. What constitutes "India-sourced" income for a trade executed on a foreign exchange between two non-resident parties is contested territory — the position is fact-specific and remains without a binding judicial precedent as of 2026.

ROR individuals are taxed on global VDA income and must report worldwide holdings. If your residential status changed during FY 2026-27 — for example, if you returned to India and became ROR after a period abroad — determine your status carefully under the 182-day and 60-day tests in Section 6 before determining whether your foreign VDA income is taxable in India for that year.

Common Mistakes and Pitfalls to Avoid

1. Treating VDA losses as setoffable capital losses. VDA losses are ring-fenced — they cannot offset capital gains from equities, mutual funds, or property, and cannot be carried forward. Entering them in the capital gains schedule as a set-off invites a defective return notice.

2. Omitting staking and airdrop income. Exchanges report this data to AIS. The Income Tax Department has these figures. Unreported staking income is a textbook Section 68 or 69A addition — unexplained income taxed at 60% plus surcharge.

3. Missing Schedule FA entirely. Holding even Rs. 5,000 worth of VDA on a foreign exchange without Schedule FA disclosure is a Black Money Act default. The "I didn't sell anything" argument does not help — holding is enough to trigger the disclosure obligation.

4. Filing ITR-1 with VDA income. ITR-1 has no Schedule VDA. The CPC will issue a defective return notice under Section 139(9), requiring you to refile in the correct form — often after the due date, attracting late-filing fees under Section 234F.

5. Not reconciling TDS from 26AS / AIS before filing. TDS deducted by exchanges appears in AIS. Mismatches between your Schedule VDA figures and AIS data trigger automated demand notices. Download both, reconcile transaction-by-transaction, and resolve discrepancies before you hit submit.

6. Assuming coin-to-coin losses net against gains. The no-set-off rule is absolute. A BTC gain and an ETH loss on the same exchange, on the same day, in back-to-back trades — they do not net. Zero exceptions.

7. Relying solely on an exchange's PDF statement as your trade ledger. Assessing officers in crypto scrutiny cases request transaction-by-transaction breakdowns including timestamps, asset quantities, INR values, exchange names, and TDS references. A consolidated annual summary is not sufficient. Maintain a granular ledger throughout the year.

Key Takeaways

• 31.2% effective rate (30% + 4% cess) applies to all VDA transfers for most retail investors in AY 2027-28 — no holding period reduces this.
• Only cost of acquisition is deductible — exchange fees on the sell side, gas fees, and maintenance charges do not reduce your taxable gain.
• VDA losses are permanently extinguished — no set-off against other VDA gains, other income heads, or future years. Plan your disposals with this in mind.
• 1% TDS under Section 194S is handled by exchanges for routed trades; P2P buyers must file Form 26QE within 30 days of month-end or face compound penalties.
• Staking rewards and airdrops are taxed as Income from Other Sources at your slab rate on the date of receipt; FMV at receipt becomes cost of acquisition for any future transfer.
• Schedule VDA is mandatory in ITR-2 or ITR-3 for every VDA transaction in FY 2026-27 — ITR-1 cannot be used if you have any crypto activity.
• Schedule FA non-disclosure for foreign exchange holdings risks penalties of up to three times the undisclosed amount under the Black Money Act — foreign exchange data flows to Indian tax authorities under FATCA and CRS.