Taxation on Virtual Digital Assets

Section 115BBH Taxation on Virtual Digital Assets

Section 115BBH of the Income-tax Act, 1961 taxes income from the transfer of Virtual Digital Assets (VDAs) at a flat 30% plus applicable surcharge and 4% health and education cess, with no deduction for any expense other than cost of acquisition, no set-off of losses against any income — not even against gains on a different VDA — and no carry-forward to future years. Union Budget 2026 has left this framework unchanged. For FY 2026-27 / AY 2027-28, every investor who bought, sold, swapped, gifted or received a VDA must understand the exact mechanics before filing — and ideally before executing the next trade.

What Qualifies as a Virtual Digital Asset Under Section 2(47A)

The definition in Section 2(47A) is deliberately broad. A VDA is:

• Any information, code, number or token — not being Indian or foreign currency — generated through cryptographic means or otherwise, providing a digital representation of value exchanged with or without consideration
• Non-fungible tokens (NFTs) or any other token of a similar nature
• Any other digital asset notified by the Central Government

In practice this covers Bitcoin, Ether, Solana, BNB, stablecoins (USDT, USDC), DeFi governance tokens, gaming tokens, fan tokens and NFTs of every variety. If a token is tradeable and is not a fiat currency, treat it as a VDA until a specific CBDT notification confirms otherwise.

Notified exclusions you need to know

The following are not VDAs for Section 115BBH purposes:

• E-Rupee (CBDC): The Reserve Bank of India's Central Bank Digital Currency is treated as Indian currency.
• Digital gold / Sovereign Gold Bonds: Instruments linked to physical gold are governed by their own capital gains rules.
• Subscription tokens: Tokens that grant access to a specific service and cannot be freely transferred may be notified as excluded.
• Loyalty points and gift cards issued by consumer businesses in the ordinary course of trade.

If you hold tokenised securities or real-world asset-backed tokens, the classification remains unsettled. Plan for them as VDAs unless you hold a specific notification confirming otherwise.

The Section 115BBH Tax Mechanics: Flat 30% With Strings Attached

What you can deduct — and only this

The cost of acquisition is the sole permitted deduction: the INR equivalent of the amount you paid to acquire the VDA, whether on an exchange, through a P2P platform or as consideration for goods and services. There is nothing else.

What you cannot deduct, offset or carry forward

Section 115BBH is explicit on all of these:

• Exchange fees, trading commissions and platform charges
• Interest on loans taken to fund the purchase
• Internet charges, hardware wallet costs, software subscriptions
• Losses on one VDA set off against gains on another VDA
• VDA losses set off against salary, business income, house property income or any other head
• No carry-forward: a VDA loss realised in FY 2026-27 is permanently extinguished and cannot reduce gains in FY 2027-28

The 30% rate applies irrespective of holding period. There is no long-term / short-term distinction for VDAs. Holding Bitcoin for three years earns you nothing more than holding it for three days — the tax rate is identical.

Why the Section 87A rebate does not apply to VDA income

Under the new tax regime (Section 115BAC), individuals with total income up to Rs. 12,00,000 pay zero tax because of the rebate under Section 87A. However, the Income-tax Act explicitly excludes income taxed at special rates — including VDA income under Section 115BBH — from the rebate calculation.

This means: if your only income in FY 2026-27 is Rs. 5,00,000 of VDA gains, you owe Rs. 1,50,000 in tax at 30%, plus cess — there is no rebate available, even though Rs. 5,00,000 falls comfortably below the Rs. 12,00,000 nil-tax threshold under the new regime. This is one of the most frequently misunderstood rules among retail crypto investors.

The No-Set-Off Rule in Practice: Why Every Token Stands Alone

The practical consequence of the no-set-off rule is severe in a volatile market. Suppose you made Rs. 5,00,000 on Ethereum but lost Rs. 4,00,000 on a collapsing altcoin in the same financial year. Under normal capital gains rules, you would pay tax on the net Rs. 1,00,000. Under Section 115BBH, you pay 30% on Rs. 5,00,000 = Rs. 1,50,000, and the Rs. 4,00,000 altcoin loss disappears permanently.

The only lever available to you is timing. If you can realise the losing position before you realise the gain — and both fall in the same FY — you have at least contained the damage by choosing which VDA to sell and when. The law offers no structural relief. Planning around the no-set-off rule means running an accurate real-time P&L on every open position throughout the year, not discovering the damage in July when filing.

Section 194S TDS: The 1% Deducted Before You Get Paid

Section 194S, effective 1 July 2022, requires the buyer of a VDA to deduct 1% TDS on the consideration paid or credited at the time of transfer. On regulated Indian exchanges — CoinDCX, Zebpay, Mudrex and similar platforms — the exchange deducts TDS automatically on behalf of the buyer and deposits it against the seller's PAN. The seller receives the net amount; the TDS appears in their Form 26AS and Annual Information Statement (AIS) on the e-filing portal (incometax.gov.in).

Threshold limits

Once cumulative payments in a financial year cross the applicable threshold, TDS applies to every transaction from the first rupee — not just the excess above the threshold.

Who deducts, who files, and which form

• Exchanges and brokers: Deduct TDS and deposit by the 7th of the following month. For March transactions, the deposit deadline is 30 April. They file quarterly TDS returns using Form 26Q.
• Specified persons buying P2P (individuals/HUFs not subject to audit): Use Form 26QE, a challan-cum-statement, filed within 30 days from the end of the month in which the deduction was made.
• Companies and firms buying from individuals P2P: File Form 26Q like any other TDS return.

P2P and off-exchange transactions

If you sell crypto to another individual via a peer-to-peer platform or informal channel, the buyer is legally responsible for deducting 1% TDS. Many P2P sellers receive gross consideration without deduction and assume they are clean. They are not — the obligation rests on the buyer, and failure to deduct attracts penalty and interest. If you buy VDA on P2P above the applicable threshold, deduct TDS and file Form 26QE. Do not wait for the seller to prompt you.

Gifts of VDAs Under Section 56(2)(x)

When a person receives a VDA without consideration, the fair market value (FMV) of the VDA on the date of receipt is taxable as income from other sources under Section 56(2)(x), at slab rates — not the 30% flat rate.

When a VDA is received for inadequate consideration — you paid Rs. 20,000 for a VDA worth Rs. 80,000 — the shortfall of Rs. 60,000 is taxable in the recipient's hands under the same provision.

Standard exemptions continue to apply:

• Gifts from specified relatives (as defined in the Act) are exempt regardless of value.
• Gifts received on the occasion of marriage are exempt.
• Gifts received under a will or by way of inheritance are exempt.

The FMV on the date of receipt becomes the recipient's cost of acquisition when they later transfer the VDA and compute tax under Section 115BBH.

Practical point: Transferring crypto to a family member to shift a gain is not tax-neutral. The recipient pays slab rates on receipt under Section 56(2)(x), then 30% on any subsequent gain. The exercise only makes sense when the recipient has significantly lower slab rates and the slab-rate tax on receipt is smaller than the 30% tax the original holder would have paid — a calculation worth running before gifting.

Worked Example: A Complete FY 2026-27 Crypto Tax Calculation

Scenario A: Retail investor — BTC gain, SOL loss and NFT sale

Priya is a salaried employee in Bengaluru. Her VDA transactions in FY 2026-27:

Taxable VDA income: Rs. 3,20,000 + Rs. 85,000 = Rs. 4,05,000

Tax at 30%: Rs. 1,21,500 Health and education cess at 4%: Rs. 4,860 Total tax on VDA income: Rs. 1,26,360

TDS already deducted and credited to Priya's Form 26AS:

• On BTC sale (exchange): 1% of Rs. 11,60,000 = Rs. 11,600
• On NFT sale (P2P buyer): 1% of Rs. 1,10,000 = Rs. 1,100
• Total TDS: Rs. 12,700

Net VDA tax payable at filing: Rs. 1,13,660

Priya's Rs. 2,50,000 SOL loss is gone permanently. She cannot use it in AY 2027-28.

Scenario B: Business owner in a surcharge bracket

Rajan is a proprietor with business income of Rs. 55,00,000 and VDA gains of Rs. 30,00,000 in FY 2026-27. Total income = Rs. 85,00,000, placing him in the 10% surcharge bracket (Rs. 50 lakh to Rs. 1 crore).

Rajan nets Rs. 19,70,400 after tax on Rs. 30,00,000 of gains — barely two-thirds of what he earned.

Advance Tax on VDA Income: The Obligation You Cannot Ignore

If your net tax liability after TDS credit exceeds Rs. 10,000 in a financial year, you must pay advance tax in four instalments.

Most retail investors realise gains sporadically and underestimate this obligation. Interest under Section 234B (1% per month from April of the assessment year until payment) and Section 234C (1% per month per quarter on shortfall) compounds quickly. If you close a large crypto position in May 2026, calculate your estimated full-year liability and pay the first instalment before 15 June 2026 — not in July 2027 when filing the ITR.

Filing Schedule VDA in Your ITR: A Step-by-Step Guide

Which ITR form to use

• ITR-2: For individuals and HUFs with salary or capital gains income but no business or professional income. Most retail crypto investors will file ITR-2.
• ITR-3: For individuals and HUFs with any business or professional income alongside VDA activity.
• ITR-1 (Sahaj): Cannot be used if you have any VDA income at all, even a single transaction. Filing ITR-1 with VDA activity results in a defective return.

Populating Schedule VDA

Schedule VDA, introduced from AY 2023-24, requires you to report each VDA type separately. For each entry, you must disclose:

1. Name or type of VDA (e.g., Bitcoin, Ethereum, NFT — Project Name)
2. Date of acquisition and date of transfer
3. Cost of acquisition (INR)
4. Full sale consideration (INR) — not the net amount after TDS
5. Profit or loss — the system computes this; loss rows appear as negative but do not reduce taxable income

Where you transacted in the same token across multiple exchanges in the year, aggregate those entries by token for Schedule VDA. Retain the underlying trade-by-trade ledger: it is your first line of defence if the return is selected for scrutiny under Section 143(3).

Reconciling your AIS and TDS certificates

Before filing, log in to incometax.gov.in → Services → Annual Information Statement (AIS). Cross-check:

• Every Section 194S TDS entry against your exchange-generated tax report
• Sale consideration figures reported by each exchange against your personal ledger

Mismatches between your Schedule VDA figures and AIS data trigger automated queries under Section 143(1). If an exchange reported a gross sale amount that differs from what you received (because fees were netted before credit), raise an AIS feedback on the portal explaining the discrepancy before you file. This avoids a demand notice and the follow-up compliance burden.

Special Situations: Mining, Staking, Airdrops and Salary in Crypto

These scenarios fall outside the straightforward buy-sell framework and require separate treatment.

Mining income: VDA received through proof-of-work mining is treated as income from other sources at the fair market value in INR on the date of receipt, taxed at applicable slab rates. When you subsequently sell those mined tokens, the gain — sale price minus FMV on date of mining — is taxed under Section 115BBH at 30%. Keep a dated record of FMV for every mining event; without it you cannot establish cost of acquisition.

Staking rewards: In the absence of a specific CBDT circular on proof-of-stake rewards, the same logic as mining applies: rewards are income from other sources at FMV on date of receipt, and subsequent disposal attracts Section 115BBH tax on the incremental gain. If the CBDT issues specific guidance before your filing date for AY 2027-28, that guidance takes precedence.

Airdrops: A VDA received as an airdrop with no prior investment is taxable as income from other sources at FMV on the date of receipt. Where an airdrop distributes new tokens proportionally to holders of an existing VDA (a "fork" or snapshot-based distribution), the tax treatment is legally unsettled — treat it as income at FMV on receipt pending a definitive CBDT ruling, and document your approach in writing.

Salary paid in crypto: If an employer pays salary in the form of a VDA, the INR equivalent on the date of credit is taxable as salary income under the normal slab-rate framework and TDS is deductible under Section 192. When you later sell that VDA, only the incremental gain from FMV at the time of salary credit to the sale price is taxed under Section 115BBH at 30%.

Common Mistakes and Pitfalls to Avoid

1. Reporting net VDA income instead of gross per token. Many investors compute gains minus losses across all tokens and report one figure. Section 115BBH requires token-level disclosure; the net figure is incorrect and structurally differs from what the AIS will show.

2. Deducting exchange fees and brokerage. Only cost of acquisition is permitted. Exchange commissions, platform fees and withdrawal charges are not deductible, however the exchange confirms them on its tax report.

3. Filing ITR-1 with crypto activity. ITR-1 has no Schedule VDA. A return filed in the wrong form is treated as defective under Section 139(9) and can be invalidated if not corrected within the prescribed time.

4. Ignoring offshore exchange transactions. Gains on Binance, Coinbase or any non-Indian platform are equally taxable under Section 115BBH. Additionally, VDA held on offshore platforms at any point during FY 2026-27 may require Schedule FA (Foreign Assets) disclosure — failure to disclose attracts penalties under the Black Money Act.

5. Assuming the Section 87A rebate eliminates VDA tax. As established above, it does not. Special-rate income under Section 115BBH is excluded from the rebate. Budget for the full 30% liability regardless of your total income level.

6. Missing Form 26QE for P2P purchases. Buyers on informal P2P channels routinely skip TDS deduction. Interest under Section 201(1A) — 1.5% per month from the date of deduction to the date of actual deposit — applies if TDS is deducted but not deposited, and a penalty under Section 271C equal to the TDS amount applies for non-deduction.

7. Not documenting FMV for mined or staked tokens at receipt. Without a dated, source-backed FMV record (exchange screenshot, CoinGecko timestamp, or similar), you cannot establish cost of acquisition for the subsequent sale, and the entire sale consideration risks being treated as the gain.

8. Skipping advance tax until the filing date. By 31 July 2027 (the ITR due date for non-audit cases in AY 2027-28), you may owe months of interest under Sections 234B and 234C on top of the principal tax. For large VDA gains realised early in the year, the interest alone can run into tens of thousands of rupees.

Key Takeaways

• 30% flat tax under Section 115BBH applies to all VDA transfers — no distinction for holding period, no beneficial long-term rate, no concession for any category of token.
• Only cost of acquisition is deductible. Exchange fees, brokerage, interest and all other costs are expressly excluded.
• Losses cannot be set off against any income — not against another VDA gain, not against salary or business income — and they cannot be carried forward. A loss in FY 2026-27 is gone permanently.
• 1% TDS under Section 194S is automatically deducted by Indian exchanges; on P2P transactions above the threshold, the buyer must deduct TDS and file Form 26QE within 30 days of the month of deduction.
• Section 87A rebate does not apply to VDA income under Section 115BBH, even if total income is below Rs. 12,00,000 under the new tax regime.
• Use ITR-2 or ITR-3 with Schedule VDA for AY 2027-28. ITR-1 cannot be used if you have even one VDA transaction.
• Advance tax is mandatory if net liability after TDS exceeds Rs. 10,000. Estimate after each significant disposal and pay by the quarterly due dates — starting 15 June 2026 — to avoid interest under Sections 234B and 234C.