Cryptocurrency trading profits in India are subject to a specific tax framework for Virtual Digital Assets (VDAs). Unlike many traditional investments, income from the transfer of VDAs is taxed at a special rate of 30%, along with applicable surcharge and cess. The law also provides for 1% Tax Deducted at Source (TDS) on specified VDA transfers. Importantly, the 1% TDS is not an additional 1% tax on top of the final tax liability; it is generally a mechanism for collecting tax at the time of the transaction.
For crypto traders, understanding these rules is essential because the tax treatment differs significantly from the rules applicable to many other investments.
What Is a Virtual Digital Asset?
Indian income-tax law uses the term Virtual Digital Asset rather than simply “cryptocurrency.” The definition covers specified digital assets, including qualifying crypto-assets that use cryptographically secured distributed ledger technology or similar technology.
The Income Tax Department’s current guidance explains that VDAs can include crypto-assets and specified NFTs, while certain items such as Indian currency, foreign currency and Central Bank Digital Currency (CBDC) are excluded from the definition.
Therefore, the first step in determining the tax treatment is understanding whether the particular digital asset falls within the VDA definition.
The 30% Tax on Crypto Profits
The central tax rule is contained in Section 115BBH of the Income-tax Act.
Income arising from the transfer of a VDA is taxed at a special rate of 30%, subject to applicable surcharge and cess. The Income Tax Department’s taxpayer guidance specifically states that gains from VDAs are taxable at 30%, along with applicable surcharge and 4% health and education cess.
For example, suppose an investor purchases cryptocurrency for ₹2,00,000 and later sells it for ₹3,00,000.
The basic gain is:
Sale value − Cost of acquisition = ₹3,00,000 − ₹2,00,000 = ₹1,00,000
The ₹1,00,000 income would generally be subject to the special 30% VDA tax, before considering applicable surcharge and cess.
The calculation is therefore different from simply adding the crypto profit to ordinary income and applying the investor’s normal slab rate.
Can Crypto Trading Expenses Be Deducted?
One of the most important features of the VDA tax regime is the restriction on deductions.
Section 115BBH provides that, while computing income from transfer of a VDA, no deduction is allowed for expenditure or allowance other than the cost of acquisition.
This means traders should not automatically assume that expenses such as internet costs, research expenses, platform charges or other business-related expenditure can be deducted from VDA income.
The cost of acquiring the VDA is specifically recognized. Other deductions are restricted under the special tax provisions.
What Happens to Crypto Losses?
The VDA tax rules are particularly important when an investor makes losses.
Under Section 115BBH, a loss from the transfer of a VDA cannot be set off against income computed under another provision of the Income-tax Act, and the VDA loss cannot be carried forward to subsequent assessment years.
For example, suppose a trader makes:
- ₹1,00,000 profit on Bitcoin
- ₹60,000 loss on another cryptocurrency
The investor should not assume that the ₹60,000 loss can simply be deducted from the ₹1,00,000 profit for the purpose of reducing taxable VDA income. The special VDA rules restrict loss set-off.
This is one of the most significant differences between VDA taxation and the treatment investors may be familiar with from other types of capital gains.
What Is the 1% Crypto TDS?
In addition to the 30% tax framework, India has a 1% TDS provision for transfers of VDAs.
Under Section 194S, tax is generally deducted at 1% of the consideration for a qualifying transfer of VDA to a resident.
For example, if a qualifying crypto transaction involves consideration of ₹1,00,000, the applicable TDS could be ₹1,000, subject to the rules and thresholds.
The important point is that 1% TDS and 30% VDA tax serve different purposes. TDS is collected during the transaction, while the 30% rate applies when determining the final tax on VDA income.
The TDS deducted can generally be reflected in the taxpayer’s tax records and considered while determining the final tax liability.
When Does the 1% TDS Apply?
The law provides threshold exceptions.
According to the Income Tax Department, no TDS under Section 194S is required where the aggregate consideration during the financial year does not exceed:
- ₹10,000 for a person other than a specified person; or
- ₹50,000 for a specified person.
A specified person includes certain individuals or HUFs meeting the conditions prescribed under the law, including specified turnover or income circumstances.
The exact TDS responsibility can also depend on how the transaction is carried out. For example, the exchange may be responsible for deducting TDS in certain exchange-based transactions.
Does Selling Crypto Trigger Tax?
Generally, the tax framework focuses on transfer of the VDA, rather than merely holding it.
If an investor buys Bitcoin and continues holding it without transferring it, an increase in its market value does not by itself represent a completed transfer.
However, selling the asset can trigger the VDA tax provisions. Transfers can also occur in forms other than a straightforward sale for Indian rupees, so traders should maintain complete transaction records.
This is particularly important for people who frequently exchange one cryptocurrency for another.
How Should Crypto Traders Maintain Records?
Crypto traders should maintain detailed records of every transaction. Useful information includes:
- Date and time of purchase
- Date and time of sale or transfer
- Quantity of cryptocurrency
- Purchase price
- Sale consideration
- Cost of acquisition
- TDS deducted
- Exchange or wallet transaction records
- Transaction IDs
- Applicable fees and charges
Keeping these records makes it easier to calculate taxable income and complete the relevant tax disclosures.
The Income Tax Department provides a separate Schedule VDA in applicable ITR forms for reporting VDA transactions. Its current guidance states that VDA income is disclosed transaction-wise in Schedule VDA in ITR-2 and ITR-3, as applicable.
What About Crypto Trading as a Business?
Frequent trading does not automatically remove the transaction from the VDA-specific tax provisions. Section 115BBH applies to income from the transfer of a VDA whether the asset is treated as a capital asset or otherwise.
Therefore, professional or high-frequency traders should not assume that classifying their activity as a business automatically allows ordinary business deductions against VDA transfer income.
Because individual circumstances can be complicated, traders with substantial activity should consider obtaining professional tax advice.
Example of Crypto Tax Calculation
Consider an investor who buys cryptocurrency for ₹4,00,000 and sells it for ₹6,00,000.
Profit = ₹6,00,000 − ₹4,00,000 = ₹2,00,000
At the 30% special rate:
Basic VDA tax = ₹2,00,000 × 30% = ₹60,000
Applicable surcharge and cess would then need to be considered.
If TDS was deducted during the transaction, that amount can generally be taken into account when determining the taxpayer’s final tax payable.
This example is simplified and does not account for every possible tax circumstance.
Conclusion
Cryptocurrency trading profits in India are subject to a specific tax regime. The key rule is the 30% tax on income from VDA transfers, with applicable surcharge and cess. The law also provides for 1% TDS on qualifying VDA transfers, subject to prescribed thresholds and conditions.
Perhaps the most important points for traders are that only the cost of acquisition is permitted as a deduction for computing VDA income, and VDA losses cannot generally be set off against other income or carried forward.
Investors should therefore maintain accurate transaction records, track TDS, report VDA transactions correctly and avoid assuming that cryptocurrency taxation works exactly like stock-market taxation. For substantial or complex crypto activity, professional tax advice can help ensure compliance with the rules applicable to the relevant financial year.
