Assumption 1: Taxation Means Legalisation
One of the most persistent myths is that by taxing Virtual Digital Assets (VDAs), the government has formally legalised or legitimised cryptocurrencies as a recognised asset class, similar to stocks or bonds. This is a significant misinterpretation. While
buying, selling, and holding crypto is not illegal, the government’s approach has been one of regulation through taxation, not formal endorsement. The framework, introduced in the 2022 Union Budget, created a specific tax regime for VDAs but did not grant them the status of legal tender. Think of it this way: income from betting and gambling is also taxed at a high rate, but that doesn’t mean the government endorses those activities as sound financial strategies. The tax rules are designed to ensure the government gets its revenue from the high volume of transactions and to track the flow of money in the digital asset space, rather than to signal a full-fledged embrace of crypto as a mainstream investment vehicle.
Assumption 2: You Can Offset Crypto Losses Against Gains
This is perhaps the most financially damaging assumption for traders. In traditional markets like equities, investors can offset losses against gains to reduce their overall tax liability (tax-loss harvesting). India’s crypto tax laws explicitly prohibit this. According to Section 115BBH of the Income Tax Act, a loss from the transfer of one VDA cannot be set off against the gain from another VDA. For example, if you make a ₹50,000 profit on Bitcoin but a ₹40,000 loss on Ethereum in the same year, you still have to pay the 30% tax on the full ₹50,000 profit. The ₹40,000 loss is completely disregarded for tax purposes. Furthermore, these losses cannot be offset against any other income (like salary or business profits) and cannot be carried forward to future financial years. Every profitable trade is taxed individually, making the regime particularly harsh for active traders.
Assumption 3: The 1% TDS Is Your Final Tax
Many investors mistakenly believe that the 1% Tax Deducted at Source (TDS) on transactions above the threshold (₹50,000 for most individuals) is their only tax obligation. This is incorrect. The 1% TDS, governed by Section 194S, is merely an advance tax and a tracking mechanism for the Income Tax Department. Its primary purpose is to create a trail of transactions for regulatory oversight. Your final tax liability on any crypto gains is the flat 30% (plus applicable cess and surcharge), as mandated by Section 115BBH. The TDS amount deducted throughout the year can be claimed as a credit against your total tax liability when you file your income tax return. However, it is not the final tax itself. The responsibility still lies with you to calculate your total gains and pay the full 30% tax, regardless of the TDS that has already been deducted.
Assumption 4: You Only Pay Tax When Cashing Out to Rupees
A common belief is that tax is only triggered when you convert your crypto back into Indian Rupees (INR) and withdraw it to your bank account. The law, however, defines a taxable event as any "transfer" of a VDA. This includes not just selling for fiat currency, but also crypto-to-crypto swaps (e.g., trading Bitcoin for Ethereum) and using crypto to pay for goods or services. Each of these transactions is considered a 'sale' for tax purposes. If you bought a token for ₹100 and later swapped it for another token when its value was ₹150, you have realised a gain of ₹50, and that gain is subject to the 30% tax. This broader definition means traders must track the cost basis and market value for every single trade, not just their on-ramp and off-ramp transactions.
Assumption 5: Gifting Crypto Is a Tax-Free Loophole
Gifting crypto is possible, but it is not a simple way to avoid taxes. The tax implications depend entirely on your relationship with the recipient and the gift's value. Gifts from specified close relatives (like a spouse, parents, siblings, or children) are completely exempt from tax for the recipient. However, if you receive crypto gifts from non-relatives and the total value exceeds ₹50,000 in a financial year, the entire value becomes taxable in your hands as 'Income from Other Sources' and is taxed at your applicable income tax slab rate. The 30% flat rate does not apply here. When the recipient later sells that gifted crypto, they will be liable for the 30% tax on any gains, with the original purchase cost of the giver being treated as their cost of acquisition.
