Under India’s Income Tax Act, virtual digital assets are cryptocurrencies, non-fungible tokens, and similar cryptographically generated tokens that the law treats as a separate class of taxable property. Profits from transferring one are taxed at a flat 30 percent under Section 115BBH, and most transactions above small thresholds carry a 1 percent tax deducted at source under Section 194S. Only the purchase cost can be subtracted from the sale price, losses cannot offset any other income, and each profitable trade is taxed on its own.
What Qualifies as a Virtual Digital Asset
Section 2(47A) of the Income Tax Act defines a VDA as any information, code, number, or token (other than Indian or foreign currency) generated through cryptographic means or otherwise, that digitally represents value and can be transferred, stored, or traded electronically.1Indian Kanoon. The Income Tax Act, 1961 The definition is deliberately wide. An asset qualifies if it functions as a store of value, a unit of account, or is used in any financial transaction or investment. Non-fungible tokens and similar tokens are explicitly included regardless of what they’re called.
The central government can also notify further categories, so newer forms of digital tokens don’t escape the net. In practice, the definition covers Bitcoin, Ethereum, and every altcoin traded on exchanges, along with NFTs representing art, collectibles, or any other tokenised asset. If it lives on a blockchain and holds transferable value, it almost certainly qualifies.
Digital Items That Are Not VDAs
Through Notification No. 74/2022 dated 30 June 2022, the Central Board of Direct Taxes carved three categories of digital items out of the VDA definition:
- Gift cards and vouchers used to buy goods or services or to receive discounts on them.
- Mileage points, reward points, and loyalty cards earned through promotional programmes and redeemable only for goods, services, or discounts.
- Digital records tied to accessing a specific website, platform, or application.
Because these fall outside the definition, they are not subject to the 30 percent tax on transfers. Credit card reward points and digital gift cards do not trigger the VDA rules.
The 30 Percent Flat Tax Under Section 115BBH
Any income from transferring a VDA is taxed at a flat 30 percent under Section 115BBH, regardless of your income slab or holding period.2Income Tax Department. Income-tax Act 1961 – Section 115BBH It applies whether you traded on an exchange, swapped one token for another, or sold an NFT. The statute says the 30 percent rate applies to virtual digital assets “whether capital asset or not,” which catches both investors and people running a trading business.3Indian Kanoon. Income Tax Act 1961 – Section 115BBH
Health and education cess of 4 percent applies on top of the 30 percent, bringing the base effective rate to 31.2 percent. Where total income crosses the surcharge thresholds, the effective rate climbs further.
What You Can Deduct, and What Happens to Losses
When computing gains on a VDA transfer, you can subtract exactly one thing: the cost of acquiring the asset.2Income Tax Department. Income-tax Act 1961 – Section 115BBH No brokerage, no exchange commissions, no interest on money borrowed to buy the token, no infrastructure costs. The 30 percent tax hits the difference between sale price and purchase price with nothing else reducing it.
Losses are treated even more tightly. A loss on a VDA transfer cannot be set off against income from any other source, whether salary, rental income, or business profits. It cannot be set off against gains from a different VDA transaction either. And it cannot be carried forward to future years.2Income Tax Department. Income-tax Act 1961 – Section 115BBH
This isolation rule is where the framework bites hardest. Gain ₹1,00,000 on one token and lose ₹1,00,000 on another in the same week, and your net position is zero. You still owe 30 percent tax on the ₹1,00,000 gain. For high-volume traders in volatile markets, real tax liability arises even in a year the portfolio shows no overall profit.
The 1 Percent TDS Under Section 194S
Every VDA transaction above a minimum threshold triggers a 1 percent tax deducted at source. The person paying for the asset, typically the buyer or the exchange facilitating the trade, must withhold 1 percent of the total transaction value and deposit it with the government at the time of payment or credit, whichever comes first.4Indian Kanoon. Income Tax Act, 1961 – 194S Payment on Transfer of Virtual Digital Asset
The threshold depends on who the buyer is. For a “specified person,” no TDS applies while total consideration for the financial year stays within ₹50,000. For everyone else, the limit is ₹10,000. A specified person is an individual or Hindu Undivided Family who either has no business or professional income, or whose business turnover in the preceding year did not exceed ₹1 crore (₹50 lakh for a profession).4Indian Kanoon. Income Tax Act, 1961 – 194S Payment on Transfer of Virtual Digital Asset Most salaried individuals and small investors fall into the ₹50,000 category; exchanges and larger businesses sit at the ₹10,000 floor.
Indian exchanges handle Section 194S automatically. Foreign platforms typically do not comply, so a buyer transacting there is responsible for deducting, depositing, and filing the TDS themselves. Failing to do so exposes you to interest and penalties even if you later pay the full 30 percent tax on your gain.
Mining, Staking, and Airdrops
Earning VDAs through mining, staking, or airdrops creates a two-stage tax obligation.
At the receipt stage, the fair market value of the tokens on the date received is treated as income from other sources and taxed at your normal slab rate, not the flat 30 percent. This applies whether you mined the coin, earned staking rewards, or received an airdrop.
At the sale stage, the 30 percent tax under Section 115BBH applies to the gain. For mining, the cost of acquisition is generally treated as zero, so the entire sale price is taxable at 30 percent. For airdrops and staking rewards, the fair market value already taxed at receipt may be claimed as the cost of acquisition, reducing the gain on sale.5National Academy of Direct Taxes. Taxation of Virtual Digital Assets
Gifted VDAs
Gifts of VDAs are also a two-stage event. At receipt, they are taxable under Section 56(2)(x) as income from other sources if the aggregate fair market value of all such gifts received during the year exceeds ₹50,000.5National Academy of Direct Taxes. Taxation of Virtual Digital Assets Once that threshold is crossed, the entire fair market value becomes taxable at slab rates, not just the portion above ₹50,000. Gifts from specified relatives under the Act, or on occasions such as marriage, are exempt at receipt.
At the sale stage, the 30 percent tax under Section 115BBH applies to any gain. The fair market value on which slab-rate tax was already paid at receipt becomes the cost of acquisition, so the same amount is not taxed twice.
Reporting VDA Income in Your Return
VDA income is disclosed through Schedule VDA, which appears in ITR-2 and ITR-3. ITR-1 and ITR-4 cannot be used if you have any VDA income. ITR-2 works for investors reporting gains as capital gains without business income; ITR-3 is required if the activity looks like a business or you already have business or professional income.
Schedule VDA requires transaction-level detail: the type of VDA, the acquisition date, the transfer date, the cost of acquisition, the sale consideration, and the resulting income. Every disposal for value gets its own line, regardless of how the asset was originally obtained. The total in Schedule VDA must match the figure entered in Schedule CG at item C2.
The 1 percent TDS deducted under Section 194S shows up in your Form 26AS and Annual Information Statement. Cross-checking these against your own transaction records before filing is the easiest way to catch mismatches. Where an employer pays part of salary in crypto, the receipt is reported under the relevant income head first, and only the later sale goes into Schedule VDA.
Penalties and Interest for Getting It Wrong
The Budget 2026–27 introduced explicit penalty provisions for VDA reporting failures. A delay in furnishing mandatory crypto transaction statements attracts a penalty of ₹200 per day. Providing inaccurate or misleading information carries a penalty of up to ₹50,000. Persistent non-compliance can push the penalty to ₹1,00,000, and may trigger broader legal proceedings or more severe tax penalties.
The standard interest rules of the Act also apply. If your VDA income creates a tax liability that requires advance tax payments and you fail to pay on time, interest at 1 percent per month accrues under Sections 234B and 234C until the tax is deposited. The CBDT has clarified that a seller can deposit the tax as advance tax and provide the buyer or exchange a copy of the challan to satisfy TDS requirements.6Income Tax Department. TDS on Payment for the Transfer of Virtual Digital Assets (VDAs)
Underreporting or misreporting VDA income also draws the general penalty framework under Section 270A, which can add 50 percent of the tax due for underreporting or 200 percent for misreporting on top of the original liability. Because the tax department now receives TDS data from Indian exchanges through Form 26AS and the AIS, gaps between reported income and deducted TDS are easy to spot.