The Core Tax Rule: A Flat 30% on Gains
Since April 2022, India has a clear but stringent tax on Virtual Digital Assets (VDAs), a category that includes all cryptocurrencies and NFTs. Any profit you make from selling, trading, or spending your crypto is taxed at a flat rate of 30%, plus applicable
cess, bringing the effective rate to 31.2%. This rule, under Section 115BBH of the Income Tax Act, applies regardless of how long you held the asset; there is no distinction between short-term and long-term gains. Furthermore, the law is unforgiving when it comes to deductions. The only expense you can deduct from the sale price is the original cost of acquisition. This means trading fees, internet charges, wallet subscription costs, or electricity used for mining cannot be claimed to reduce your taxable profit.
Understanding the 1% TDS
Adding another layer of complexity is the 1% Tax Deducted at Source (TDS) on all VDA transfers exceeding certain thresholds, which has been in effect since July 2022. Under Section 194S, for every transaction—be it selling crypto for Indian Rupees or swapping one crypto for another—1% of the total transaction value is deducted and paid to the government. The primary purpose of this TDS is not to collect income tax upfront but to create a trail for the tax authorities to track all crypto transactions. This deduction applies even if your trade results in a loss. For investors using Indian exchanges, this TDS is typically handled automatically. However, for peer-to-peer (P2P) or international exchange transactions, the buyer is often responsible for deducting and depositing the TDS, a compliance point that can be easily missed.
The Harsh Reality of Crypto Losses
Perhaps the most punitive aspect of India's crypto tax regime is the treatment of losses. Unlike in the stock market, you cannot offset your crypto losses against any gains. This means a loss from one cryptocurrency cannot be used to reduce the taxable profit from another. For example, if you gain ₹50,000 on Bitcoin but lose ₹50,000 on Ethereum in the same year, you still owe a 30% tax on the ₹50,000 Bitcoin profit, while the loss is completely ignored for tax purposes. Additionally, these losses cannot be set off against other income sources like salary or capital gains from property, nor can they be carried forward to future financial years to offset future profits. This makes risk management for active traders particularly challenging.
The Regulatory Void Creates Uncertainty
While the tax rules are specific, the broader legal framework for crypto in India remains a significant grey area. Cryptocurrencies are not recognized as legal tender, meaning they cannot be used for payments. However, owning and trading them is legal. This strange duality exists because the government has focused on taxation and anti-money laundering compliance without creating a comprehensive regulatory bill that defines what VDAs are as an asset class or who should regulate them. Bodies like the RBI, SEBI, and the Finance Ministry are still negotiating a shared framework, leaving investors in a state of limbo regarding investor protection, market conduct rules, and the long-term status of their holdings.
Practical Steps for Every Investor
Given the strict compliance requirements, meticulous record-keeping is non-negotiable. For every transaction, you must track the date, the quantity, the value in rupees at the time of the transaction, and the TDS deducted. Since April 2026, reporting rules have become even tighter, with penalties for exchanges that fail to report user transactions accurately to the Income Tax Department. This means your trading activity is more visible to authorities than ever before. Investors must report all transactions in the 'Schedule VDA' section of their Income Tax Return (ITR). Due to the complexity, especially the inability to offset losses and the specific handling of TDS, consulting a chartered accountant or tax professional who specializes in VDAs is highly advisable to ensure accurate filing and avoid potential penalties.
