Taxation Of Cryptocurrencies In India: Legal Framework, Judicial Developments, And Emerging Challenges

Introduction

The exponential growth of cryptocurrency trading and blockchain-based assets in India has compelled lawmakers to confront a regulatory paradox: while cryptocurrencies are not recognised as legal tender, their economic footprint is undeniable. India’s response has not been to legitimise private cryptocurrencies as currency, but to bring them firmly within the tax net.

Through the Finance Act, 2022, the Government of India introduced a standalone taxation regime for crypto assets by classifying them as “Virtual Digital Assets” (VDAs) under the Income Tax Act, 1961. This marked a decisive policy shift from regulatory ambiguity to fiscal certainty by imposing a flat 30% tax on income from VDA transfers, alongside 1% tax deducted at source (TDS) on transactions.

Legal Recognition of Cryptocurrencies as “Virtual Digital Assets”

Statutory Definition under the Income Tax Act

The Finance Act, 2022 inserted clause (47A) in Section 2 of the Income Tax Act, 1961, defining a Virtual Digital Asset in intentionally broad and technology-neutral terms. A VDA includes: “Any information, code, number or token generated through cryptographic means or otherwise, providing a digital representation of value, which can be transferred, stored or traded electronically.”

This expansive definition captures:

• Cryptocurrencies such as Bitcoin, Ethereum, and stablecoins
• Non-Fungible Tokens (NFTs)
• Other blockchain-based digital tokens with economic value

Importantly, the definition excludes digital currency issued by the Reserve Bank of India, thereby distinguishing private crypto assets from the Central Bank Digital Currency (CBDC).

The Central Government has also exercised delegated legislative powers to exclude certain loyalty points, reward programmes, and gaming credits, clarifying that not all digital representations fall within the VDA regime.

Taxation of Cryptocurrency Transactions under Indian Law

Section 115BBH: Special Tax Regime for VDAs

The cornerstone of crypto taxation in India is Section 115BBH, which introduces a special charging provision applicable to all VDA transfers. Key features include:

• Flat tax rate of 30% on income arising from the transfer of any VDA
• Applicable irrespective of holding period, nature of taxpayer (individual, HUF, company), and frequency of transactions
• No deduction permitted except for the cost of acquisition
• No set-off of losses against other VDAs, any other head of income (salary, business income, capital gains), and no carry forward of VDA losses to future assessment years

The regime operates as a self-contained code, overriding conventional capital gains provisions under Sections 45–55.

Meaning of “Transfer” of a VDA

The term “transfer” is interpreted expansively, drawing from Section 2(47) of the Act, and includes:

• Sale of cryptocurrency for fiat
• Exchange of one crypto asset for another
• Barter transactions
• Use of crypto as consideration for goods or services
• Gifting of VDAs (with tax implications for the recipient)

As a result, even non-cash transactions can trigger taxable events.

Withholding Tax under Section 194S

To strengthen tax compliance and reporting, Section 194S mandates a 1% TDS on every transfer of a VDA to an Indian resident, effective 1 July 2022. Notable aspects include:

• Applies regardless of profit or loss
• No minimum transaction threshold for most taxpayers
• Obligations extend to exchanges, brokers, and peer-to-peer transactions

While designed as a reporting mechanism, this provision has been criticised for liquidity constraints and market inefficiencies, particularly for high-frequency traders.

Reserve Bank of India’s Regulatory Position on Cryptocurrencies

The Reserve Bank of India (RBI) has consistently maintained that private cryptocurrencies are not legal tender and pose systemic risks to financial stability.

Key Regulatory Milestones

• 2013 & 2017: RBI issued public cautions highlighting risks of volatility, fraud, and money laundering
• April 2018: RBI prohibited regulated entities from providing banking services to crypto exchanges
• 2020 Supreme Court Intervention: In Internet and Mobile Association of India v. RBI¹, the Supreme Court struck down the RBI circular, holding that cryptocurrency trading is not illegal, a blanket banking ban without demonstrable harm violates proportionality principles

Post-judgment, crypto exchanges resumed operations, albeit under enhanced scrutiny and compliance expectations.

Judicial Recognition of Cryptocurrency as Property

Indian courts have begun clarifying the legal character of cryptocurrencies, particularly in private law disputes.

Madras High Court: Crypto as Intangible Property

In Rhutikumari v. Zanmai Labs Pvt. Ltd. (2025), the Madras High Court recognised cryptocurrency as intangible property, holding that:

• Cryptos can be owned, transferred, inherited, and held in trust
• Lack of sovereign backing does not negate proprietary rights
• Exchanges may owe fiduciary and custodial obligations

This ruling aligns Indian jurisprudence with international trends treating digital assets as property rather than currency, with significant implications for taxation, insolvency, succession, and enforcement.

Emerging Challenges in Cryptocurrency Taxation

Despite legislative clarity on rates, substantive and operational challenges persist.

• Classification Ambiguity: As per the provisions of the Income Tax Act, the transfer of virtual digital assets attracts a flat tax in terms of Income tax Act section (or chapter), however, no definition has been provided as to whether these transfers would be considered as business income or capital gains, or income from other sources under the Tax Act. Therefore, it is not clear what type of income the taxpayers will have from these activities.
• Valuation: Cryptocurrency values fluctuate wildly from one day to the next, as well as differing between exchanges on any given day. Therefore, the fair market value at the time of the asset transfer must be used to determine the tax liability associated with that transaction in INR currency, but there are currently no legal requirements mandating a specific way of valuing cryptocurrencies.
• Anonymity: Cryptocurrency transactions are pseudonymous; hence, it is not easy to know who truly owns what cryptocurrency. Although exchanges comply with KYC and AML regulations, peer-to-peer and offshore exchange activities allow for anonymity and make tracing those transactions more difficult.
• No loss offsets: As it currently stands, individual traders have no opportunity to offset their trading losses (whether virtual or traditional) against taxable income tax (e.g., Wages and Salaries) or carry those losses forward to subsequent years. Therefore, the method of tax will only tax on net gains, creating an unequal taxation situation based on amount traded and making it less likely that they will trade in the future.
• Double Taxation Issues: Many cryptocurrency transactions are cross-border in nature. For example, an Indian resident might be trading on a foreign cryptocurrency exchange. Therefore, it is possible for that resident to be liable for taxes in more than one jurisdiction for the same transaction. Since there are no specific treaty provisions for digital assets, the issues around double taxation and determining the source of income remain unresolved at this time.

Conclusion

India’s cryptocurrency taxation regime reflects a deliberate policy choice: to tax digital assets without legitimising them as currency. By classifying cryptocurrencies as Virtual Digital Assets, the legislature has prioritised revenue certainty and regulatory oversight over market facilitation.

Judicial developments now recognise crypto as intangible property, reinforcing its taxable character while expanding private law protections. However, unresolved issues around valuation, loss treatment, income classification, and cross-border taxation indicate that the legal framework remains evolutionary rather than settled.

1. Writ Petition (Civil) No.528 of 2018. ↩︎