Cryptocurrency Taxation: Regulations and Reporting Requirements in India

 

Rahul bought some Bitcoin in 2023, sold half of it last year at a decent profit, and moved on with his life. It was only while filing his return this year that his CA asked him a simple question — where has he shown this in his ITR? Rahul knew he'd made money. He had no idea how he was supposed to explain it to the tax department.

Stories like this are more common than people think. A crypto trade happens inside an app, feels informal, and nothing about the interface reminds you that the Income Tax Department is tracking it too. But since 2022, India has had a fairly strict, dedicated framework for taxing cryptocurrency and similar digital assets. It applies to the casual investor who bought a bit of Ethereum out of curiosity just as much as it applies to a full-time trader.

Here's how the rules actually work, and where people tend to slip up.

 

What Is a Virtual Digital Asset (VDA)?

 

Indian tax law avoids the word "cryptocurrency" altogether. Instead, it uses the term Virtual Digital Asset, defined under Section 2(47A) of the Income Tax Act. Broadly, a VDA is any code, number, or token generated using cryptographic methods that carries a digital representation of value — Bitcoin and Ethereum fall under this, and so do NFTs and other tokens the government notifies from time to time.

You don't really need to understand how blockchain works to make sense of the tax rules. What matters is simpler: if the asset you're holding fits this definition, it's governed by a separate set of tax provisions, not the ones used for shares, mutual funds, or property.

 

How Cryptocurrency Is Taxed in India

 

This is usually where the confusion starts, mostly because crypto tax doesn't behave like anything people are already used to from equities or real estate.

The rate is flat, and it doesn't move. Under Section 115BBH, income from transferring a VDA is taxed at 30%, plus a 4% health and education cess, which brings the effective rate to 31.2%. It makes no difference which income slab you're in or how long you held the asset — there's no long-term holding benefit here, and technically no minimum threshold below which the gain escapes tax.

Deductions are limited too. When working out your gain, you can subtract only the cost of acquisition — what you actually paid to buy the asset. Exchange charges, platform fees, internet costs, none of that is deductible against VDA income, unlike some other capital gains computations.

A quick example makes this easier to follow. Say you bought Ethereum for ?1,00,000 in June and sold it for ?1,50,000 in December.

Sale consideration comes to ?1,50,000, cost of acquisition was ?1,00,000, so the taxable gain works out to ?50,000. Tax at 30% is ?15,000, cess adds another ?600, and the total payable lands at ?15,600 — irrespective of what tax bracket your salary or other income falls into.

Losses are where the rules get genuinely unforgiving. Lose money on one VDA and you cannot adjust it against gains from another VDA, even if both happen to be cryptocurrencies. You definitely can't set it off against salary, business income, or gains from shares. And unlike almost every other kind of loss recognised under the Act, a VDA loss cannot be carried forward either. Once the financial year ends, that loss is gone for tax purposes — there's no future benefit waiting for it.

 

TDS on Cryptocurrency Transactions — Section 194S

 

Alongside the 30% tax on gains sits a separate mechanism: Tax Deducted at Source, or TDS, under Section 194S. In simple terms, a small slice of the payment gets held back and deposited with the government before the seller even receives the full amount.

A few practical points worth knowing:

The buyer, or more commonly the exchange handling the trade, deducts 1% TDS on the value paid for the VDA. This kicks in once your transactions cross ?50,000 in a financial year for most people, though the threshold drops to ?10,000 for what the law calls "specified persons" — broadly, individuals or HUFs without business income, or those under certain turnover limits.

On Indian exchanges, this deduction happens on its own and shows up later in your Form 26AS or AIS. With peer-to-peer deals or platforms that don't handle TDS automatically, the responsibility to deduct and deposit it can shift to the buyer.

One thing worth repeating clearly: TDS is not your final tax bill. It's a small advance collection, adjustable later against your actual 30% liability when you file. If it turns out more was deducted than you owe, you get a refund. In most cases though, since TDS is just 1% against a 30% tax rate, you'll still owe the balance. A fair number of tax notices each year trace back to exactly this mix-up — people assuming that because tax was already deducted, nothing more needs to be paid.

 

Reporting Cryptocurrency in Your Income Tax Return

 

Paying the right amount of tax is one job. Reporting it correctly in your return is another, and doing only the first without the second can still cause problems.

VDA income goes into a dedicated Schedule VDA within the applicable ITR form — usually ITR-2 if you're reporting capital gains without business income, or ITR-3 if the trading is treated as business income. The schedule wants transaction-level detail: acquisition date, transfer date, sale value, cost of acquisition, and the resulting gain for each entry.

Before you file, it's worth comparing your own records against Form 26AS and AIS, since these will already show whatever TDS the exchanges have deposited against your PAN. A gap between what you report and what the department already has on file — through TDS filings by exchanges — is one of the more frequent reasons people end up fielding a query later.

It's also worth knowing that the obligation to report doesn't switch off just because a transaction resulted in a loss or a negligible gain. Plenty of taxpayers skip small entries assuming there's no tax impact, but the requirement to disclose in Schedule VDA isn't strictly tied to whether tax ends up being payable on that particular line.

 

What Records Should Crypto Investors Maintain?

 

Crypto trading tends to generate a lot of transactions, so keeping things organised isn't really optional if you want your reporting to hold up. At minimum, hold onto:

• Purchase and sale dates for each transaction

• Quantity bought or sold

• Purchase price and sale consideration

• Statements or transaction history from every platform used

• Transaction IDs

• TDS details as reflected in Form 26AS or AIS

• Bank statements covering transfers to and from exchanges

• Wallet records, particularly for peer-to-peer transfers

If you've spread activity across more than one exchange, or moved coins between wallets, this becomes far more important. Trying to piece together a year of scattered transactions the night before filing is not an experience worth repeating.

 

Common Cryptocurrency Tax Mistakes

 

A handful of patterns keep showing up among crypto taxpayers year after year.

Some people still assume crypto sits outside the tax net simply because it isn't "real" currency issued by a bank — it doesn't, and arguably it's taxed more strictly than most assets. Others treat the 1% TDS as though it were the entire tax bill, when it's nowhere close to the actual 30% liability. A good number simply don't report transactions at all, especially ones routed through international exchanges that don't issue Indian-style tax statements. There's also a tendency to try setting off crypto losses against salary or other capital gains, not realising Section 115BBH blocks this outright. Small or "test" transactions often get skipped entirely on the assumption they're too minor to bother reporting. Some taxpayers trust an exchange-generated tax statement completely and file without cross-checking it. And quite a few forget to reconcile TDS entries against Form 26AS or AIS before submitting their return, which is often what triggers a mismatch notice in the first place.

 

Simple Example: From Crypto Transaction to Tax Reporting

 

Here's the whole journey stitched together with one example.

Priya buys 0.5 units of a cryptocurrency for ?80,000 in April, then sells it for ?1,20,000 in November through an Indian exchange. The exchange deducts 1% TDS on the sale amount — ?1,200 — and deposits it against her PAN.

Her taxable gain comes to ?1,20,000 minus ?80,000, which is ?40,000. Tax at 30% is ?12,000, plus 4% cess of ?480, for a total liability of ?12,480. Since ?1,200 was already collected as TDS, she owes the remaining ?11,280 as self-assessment tax, subject to her broader tax computation for the year. When she files ITR-2, she reports this in Schedule VDA and checks the ?1,200 TDS entry against her AIS before submitting.

Purchase, sale, tax calculation, TDS adjustment, reporting — that's the full cycle, start to finish.

 

Frequently Asked Questions

 

Is cryptocurrency legal in India?

Owning and trading VDAs isn't banned. There's no dedicated regulatory framework governing crypto as an asset class the way SEBI governs securities, but the Income Tax Act clearly taxes gains from it, which is what this article covers.

 

Do I have to pay tax if I haven't sold my crypto?

No. Tax under Section 115BBH applies on transfer — when you sell, swap, or otherwise dispose of the asset. Simply holding it doesn't create a tax event.

 

Can I reduce my crypto tax by claiming exchange fees or internet charges?

Generally, no. Section 115BBH allows a deduction only for the cost of acquisition. Other expenses connected to the transaction usually cannot be claimed.

 

What if I only made a small profit — do I still need to report it?

Yes. There's no minimum threshold under which VDA income escapes tax or reporting. Even modest gains are taxed at the flat 30% rate and need to appear in Schedule VDA.

 

Is TDS the same as my final tax liability?

No, and this is one of the most common misunderstandings. TDS under Section 194S is 1%, deducted upfront and adjustable against your actual liability, which is 30% plus cess. You'll almost always owe more than what was deducted as TDS.

 

Can I set off my crypto losses against my salary or stock market gains?

No. Losses from VDA transfers cannot be set off against any other head of income, and they also cannot be carried forward to future years.

 

Which ITR form should I use to report crypto income?

This depends on how the income is characterised. Individuals reporting VDA gains as capital gains typically use ITR-2, while those treating it as business income use ITR-3. It's best to check the current year's ITR instructions or consult a tax professional if you're unsure which applies to you.

 

Do gifts of cryptocurrency get taxed differently?

Receiving crypto as a gift can attract tax under separate provisions dealing with gifts, depending on the value and your relationship with the giver. This is a fact-specific area, and it's worth getting professional advice if it applies to you.

 

Final Takeaway

 

Cryptocurrency taxation in India isn't just about paying 30% when a trade goes well. It's really three separate obligations working together — calculating tax correctly under Section 115BBH, tracking TDS deducted under Section 194S, and reporting every transaction accurately in Schedule VDA. Getting two of these right and missing the third can still leave you dealing with a notice or a mismatch that takes real time to sort out.

Given how unforgiving these rules are, especially around losses, it's worth speaking to a qualified tax professional if your crypto activity spans multiple platforms or goes beyond straightforward buying and selling.