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Capital gains on virtual digital assets

Capital Gains on Virtual Digital Assets: Tax Rules, Calculation, and Compliance in India

Virtual Digital Assets (VDAs), including cryptocurrencies and NFTs, have become increasingly popular among investors in recent years. To bring clarity to their tax treatment, the Income Tax Act introduced specific provisions governing the taxation of these assets.

In this post, we will discuss the tax rate applicable to VDAs, the calculation of tax on gains, deductions allowed, treatment of losses, TDS provisions, and key compliance requirements for investors.

Let’s go through these sections in detail:

What are Virtual Digital Assets (VDAs)?

Before understanding the tax implications, it is important to know what Virtual Digital Assets (VDAs) are. VDAs are digital assets that hold value, such as cryptocurrencies like Bitcoin and Ethereum, and NFTs. These assets can be bought, sold, transferred, or used for various financial transactions.

In India, VDAs came into focus after the Union Budget 2022 introduced a specific tax framework for income earned from these assets. This helped bring more clarity on how profits from cryptocurrencies and other digital assets would be taxed. However, the rules and regulations around VDAs are still developing.

Taxation of Virtual Digital Assets in India

The taxation of Virtual Digital Assets (VDAs), including cryptocurrencies and NFTs, was introduced in India through the Finance Act, 2022. To bring clarity on how income from these digital assets should be taxed, the government added specific provisions to the Income Tax Act, 1961.

1.Tax on Income from VDAs under Section 115BBH

Under Section 115BBH, any income earned from the transfer of a Virtual Digital Asset (VDA) is taxed at a flat rate of 30%, along with the applicable surcharge and cess. While calculating the taxable income, only the purchase cost of the asset can be claimed as a deduction. No deduction is allowed for any other expenses related to the transaction.

The provision also restricts taxpayers from adjusting losses incurred on VDA transactions against any other income. Such losses cannot be carried forward to subsequent financial years either. Further, certain tax exemptions that are available on capital gains from other assets do not apply to Virtual Digital Assets.

2.Taxability of VDA Gifts under Section 56(2)(x)

The Finance Act, 2022 also made Virtual Digital Assets (VDAs) subject to gift tax provisions. If an individual or a Hindu Undivided Family (HUF) receives a VDA as a gift without paying anything for it, and its value exceeds ₹50,000, the value of the asset may be taxable in the hands of the recipient.

If a person regularly buys and sells VDAs as part of an organised activity, the transactions may be treated as a business. In such cases, the income is taxed under the head “Profits and Gains of Business or Profession”, and the applicable VDA tax rules continue to apply.

3.TDS on VDA Transactions under Section 194S

To improve tax compliance in VDA transactions, Section 194S requires the buyer to deduct 1% TDS before making payment to the seller.

However, TDS is applicable only when the total value of VDA transactions during a financial year exceeds the specified limit. The threshold is ₹50,000 for specified persons and ₹10,000 for all other taxpayers. Once this limit is crossed, TDS must be deducted on the applicable transactions.

Tax Rate on Gains from VDAs

Income earned from the sale or transfer of Virtual Digital Assets (VDAs), such as cryptocurrencies and NFTs, is taxed under Section 115BBH of the Income-tax Act.

Particulars	Tax treatment
Tax rate on gains	30% (plus applicable surcharge and cess)
Applicability	Transfer of cryptocurrencies, NFTs, and other VDAs
Indexation benefit	Not available
Special rate overrides normal slab rates	Yes

How are Gains from VDAs Calculated?

Gains are computed on a transaction-by-transaction basis.

Formula : Taxable Gain = Sale Consideration − Cost of Acquisition

Example:

Particulars	Amount (₹)
Purchase cost of crypto	1,00,000
Sale value	1,40,000
Taxable gain	40,000

The ₹40,000 gain is taxed at 30% under Section 115BBH, plus surcharge and cess as applicable.

What Deductions are Allowed?

Under the Income Tax Act, only the cost of acquiring the Virtual Digital Asset (VDA) can be claimed as a deduction while calculating taxable income.

The following expenses cannot be claimed as deductions:

Exchange or trading platform fees, unless they form part of the acquisition cost as per accounting records
Brokerage or transaction charges that are claimed separately
Interest paid on loans taken to purchase VDAs
Mining-related expenses, electricity charges, or other operating costs
Any other expenditure, allowance, or expense incurred in relation to the VDA

Can Losses from VDAs Be Set Off?

No. Section 115BBH specifically restricts loss adjustment.

Situation	Allowed?
Set off VDA loss against salary/business income	No
Set off VDA loss against capital gains from other assets	No
Set off one VDA loss against another VDA gain	No
Carry forward VDA losses to future years	No

Each taxable gain is taxed independently, and losses do not provide a tax shield.

TDS on Virtual Digital Assets

Section 194S (now section 393(1) Sl.8(vi) ) requires tax deduction at source on consideration paid for transfer of a VDA.

Particulars	Provision
TDS rate	1% of consideration
Applicable from	1 July 2022
Threshold – specified persons (mainly individuals/HUFs with small turnover)	₹50,000 in a financial year
Threshold – others	₹10,000 in a financial year

TDS is deducted on the total transaction value and not on the profit earned.

For example, if you sell cryptocurrency worth ₹2,00,000 through an exchange, TDS of ₹2,000 (1% of ₹2,00,000) will be deducted and deposited with the government.

Impact of TDS on Investors

When a VDA transaction is subject to TDS, the investor receives the sale proceeds after deduction of 1% TDS.
The TDS amount deducted can be claimed as a tax credit while filing the income tax return.
This deduction helps the Income Tax Department keep track of VDA transactions and improve tax compliance.
For active traders who carry out multiple transactions, frequent TDS deductions can reduce the funds available for trading until the credit is adjusted against their tax liability or refunded.

Quick illustration:

Particulars	Amount (₹)
Sale consideration	2,00,000
Less: TDS @ 1%	(2,000)
Amount received	1,98,000

The ₹2,000 deducted is not an extra tax. It can be claimed as TDS credit while filing the investor’s income tax return.

Best Practices for VDA Tax Compliance

Maintain proper records of all your crypto transactions, including purchase invoices, exchange statements, wallet details, and transfer records.
Keep track of the purchase cost of your crypto assets so that profits can be calculated correctly when they are sold or transferred.
Check whether the TDS deducted under Section 194S is reflected in your Form 26AS or AIS before filing your income tax return.
Report all taxable crypto transactions, including crypto-to-crypto trades, NFT sales, and other transfers of virtual digital assets, wherever applicable.
File the correct ITR within the due date and disclose VDA income in the relevant sections while claiming eligible TDS credit.
Keep exchange statements and other supporting documents safely for future reference in case the tax department seeks clarification or verification.

Key takeaway

Income from the transfer of VDAs is taxed at a flat rate of 30%.
Only the cost of acquisition (purchase cost) can be claimed as a deduction.
Losses from VDA transactions cannot be set off against other income.
VDA losses cannot be carried forward to future years.
1% TDS may apply to eligible VDA transactions.
Proper transaction records should be maintained for tax purposes.
TDS deductions should be tracked to ensure accurate tax compliance.

By that, we come to the end of this post on the taxation of Virtual Digital Assets (VDAs) in India. Understanding the applicable tax provisions and compliance requirements can help investors manage their VDA transactions more effectively and avoid potential tax issues.

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