This article has been written by Ahmad Faraz Jahangir pursuing a Certificate Course in Advanced Civil Litigation: Practice, Procedure and Drafting from LawSikho.

This article has been edited and published by Shashwat Kaushik.


Cryptocurrency, in its simple sense, is a digital asset based on a blockchain and secured by cryptography. The first cryptocurrency, Bitcoin, was launched in 2009, right after the global financial crisis, by a pseudonymous person named Satoshi Nakamoto. He termed it a purely peer-to-peer version of electronic cash that would allow online payments to be sent directly from one party to another without going through a financial institution. The early adopters of Bitcoin saw it as a minable, decentralised, permissionless, borderless, non-inflationary, transparent digital money. After Bitcoin, Litecoin was launched in 2011, Dogecoin in 2013, and Tether in 2014. Until the launch of Ethereum in 2016, cryptocurrency was only “internet money.” Ethereum introduced the concept of smart contracts, allowing users to develop applications on the blockchain. This gave endless possibilities for the usage of blockchain. Price wise, Bitcoin, which was valued at $0.0006 in 2009, had soared to an all-time high price of $20000 by December 2017. Institutional investments started pouring into Bitcoin by 2021, when it appeared on the balance sheets of some US publicly listed companies. El Salvador became the first country to adopt Bitcoin as a legal tender. The total market capitalisation of all cryptocurrencies reached an all-time high of $3 trillion in November 2021. It is estimated that in India alone, there are more than 15 crore cryptocurrency holders.

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Crypto exchanges vs stock exchanges

In the early days of Bitcoin, there were no liquid markets for crypto assets. Bitcoin was either tendered as currency in exchange for good or services, or it was sold for fiat on forums, chat groups, channels, etc. Over the years, many crypto exchanges have come up with huge markets for crypto assets. Crypto exchanges follow the order book method for settling trades, just like traditional stock exchanges. However, there are many differences, as noted below:

Stock exchangeCrypto exchange
Follows a heavily regulated statutory frameworkUnregulated with no statutory framework
Public and transparentPrivate with little or no transparency
Constrained, bordered accessBorderless access
Strict KYC norms for setting up accountLittle or no KYC norms for creating account
Trades are placed through depository participantTrades are placed directly by asset holders
Follows a T+2 settlement periodA trade settlement is immediate
Assets can only be sold in one currencyAssets can be exchanged for other assets
Open for a specific time onlyOpen 24 hours, 7 days
Example: BSE, NSEExample: Binance, Coinbase, and Huobi

Different forms of income from cryptocurrencies

The ability to develop apps on blockchain through smart contracts has provided coders with vast opportunities. Decentralized Finance (DeFi) is an entirely new segment with new income generation ideas. Today, there are a number of ways to earn income from cryptographic assets. These include:

Trading income

Trading of digital assets is very similar to trading of stocks in the cash/spot segment. Users can either sell crypto assets for fiat currency or for another crypto asset.

Derivative income

Just like futures and options in the stock market, crypto exchanges also offer derivative products with leverage of up to 100x. Some popular derivative exchanges are Bybit, Deribit, etc.


Airdrop is a marketing strategy where qualifying members are given free crypto at launch. This increases the number of holders and advertises the platform. Eg. In 2020, Uniswap, a decentralised exchange built on Ethereum, airdropped 400 UNI tokens each to 2.2 lakh eligible wallets when the price of 1 UNI token was $3. Thus, each eligible wallet received free assets worth $1200.

Staking income

Blockchains that are built on proof-of-stake technology require validator nodes to secure their network and validate transactions. Staking is a process where users delegate native assets to a validator node to participate in the security and verification of transactions on the blockchain. In return, the users receive a share in network fee. E.g., Cosmos blockchain provides an ROI of approx. 20% p.a. for staking ATOM and securing its network.

Yield farming

In yield farming, a pair of assets are combined together to form a pooled asset. This pooled asset, known as the liquidity pool, is deposited in a decentralised exchange. The liquidity pool helps decentralised exchanges offer asset swap facilities. As consideration, the depositor receives a share of the asset swap fee. To attract depositors, newer decentralised exchanges also offer additional income in the form of native token emissions. Eg., PancakeSwap, a decentralised exchange built on BinanceSmartChain, offers, as of the date of writing this article, an approximate 25% APR on the BNB-USDT liquidity pool. The current APR may be checked here.

Interest on asset lending

This is another form of passive income where users get interest on assets lent under a lending protocol. The lending protocol receives assets and lends them to borrowers. E.g., Aave, a multichain lending protocol, as of the date of writing this article, is offering a return of 9% p.a. to lenders of Tether (USDT). Current interest rates may be checked here.


Some crypto protocols share platform fees and profits with users who buy and hold native tokens of the protocol. This is similar to the distribution of the profits of a company as a dividend. For example, UniDex, a cross-chain aggregator, distributes its platform fee to holders of the UNIDX token.

Taxability of cryptocurrencies

The taxability of cryptocurrencies is a significant problem for tax legislators. This is because there is no global consensus on the regulation of these classes of assets. There is also no single definition of what constitutes a cryptocurrency or at what event it is to be taxed. While some countries like Belarus, El Salvador, Portugal, Uzbekistan, Singapore, Dubai, and Saudi Arabia do not levy tax on cryptocurrency, other countries levy tax either through general provisions or specially enacted ones. In India, the legislators introduced a crypto specific tax scheme by amending the Income-Tax Act of 1961 (hereafter the “Act”) through the Finance Act of 2022. Under the scheme, India parted with the generic term “cryptocurrency” and called it “virtual digital assets” (hereafter “VDA”). A brief summary of the amendments is as follows:

  • Section 2(47A) defines the meaning of VDA.
  • Section 115BBH provides the rate and method for taxation of income from VDA
  • Section 194S imposes liability on certain buyers of VDAs to deduct tax at source.
  • Section 56(2)(x) creates a charge on receipt of VDA without consideration or inadequate consideration.

All VDA income arising from the transfer of VDA is taxed under Section 115BBH. Any other VDA income is taxed under the general provisions of the Act. The provisions are explained in detail below: 

Meaning of virtual digital assets

Section 2(47A) defines VDA as follows:

  • Any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account, including its use in any financial transaction or investment, but not limited to investment scheme; and can be transferred, stored or traded electronically;
  • A non-fungible token or any other token of similar nature, by whatever name called;
  • Any other digital asset, as the Central Government may, by notification in the Official Gazette, specify:

Provided that the Central Government may, by notification in the Official Gazette, exclude any digital asset from the definition of a virtual digital asset subject to such conditions as may be specified therein.

Explanation.—For the purposes of this clause,

  • “Non-fungible token” means such digital asset as the Central Government may, by notification in the Official Gazette, specify;
  • The expressions “currency”, “foreign currency,” and “Indian currency” shall have the same meanings as respectively assigned to them in clauses (h), (m) and (q) of section 2 of the Foreign Exchange Management Act, 1999 (42 of 1999);

Breaking down the definition, it may be noted that VDA includes three categories of assets and excludes certain assets.

Inclusions to virtual digital assets

Category 1 – 2(47A)(a)

This is a general category that provides a very wide definition of VDA. It covers:

  • Any information, code, number or token,
  • Generated through cryptographic means or otherwise,
  • Provides a digital representation of value exchanged with or without consideration, or
  • Can be transferred, stored or traded electronically.

Every crypto asset is a code generated through cryptographic means. Not every crypto has a value, but every traded crypto has a digital representation of the value exchanged. The exchange may be with consideration or without consideration, as in the case of free airdrops. Tradable crypto assets have inherent value and also act as a store of value. Needless to say, every cryptocurrency can be transferred and stored electronically.

Thus, the definition covers all payment cryptocurrencies, gas coins, non-fungible tokens, utility tokens for decentralised applications, service cryptocurrencies, media coins, etc.

Category 2 – 2(47A)(b)

Non-fungible token (hereafter “NFT”) is a digital token generated by cryptography on a blockchain that has a distinct identity. The only difference between NFT and other crypto assets is that every NFT has a unique identity that can’t be replaced, whereas other crypto assets are interchangeable. This may be understood by the following example.

Example of fungibility: A person deposits 10 ETH in a lending protocol to earn interest. Later, he withdraws it. The 10 ETH that he withdraws now is not the same that he deposited. However, it is still ETH with the same value.

Example of non-fungibility: A person holds an NFT token “ABC” on the Ethereum blockchain. He may deposit the NFT under any lending protocol. However, when he withdraws it, the token remains the same NFT token, “ABC.” When he sells it, the token retains its unique identity with the additional details of its previous holder.

Example in Indian context: Unlisted equity shares held through physical share certificates are non-fungible in the sense that every share has its unique “distinctive number” printed on the share certificate with the details of previous holders at the back of it. In contrast, when the shares are dematerialized, they lose their distinct identity. The dematerialized shares are fungible, i.e., every share will be identical and inter-changeable and they will have no unique characteristic such as distinctive number, certificate number, folio number, etc.

NFTs or any other token of similar nature fall within the general definition of VDA 2(47A)(a). However, the legislature has clearly included it separately, probably to avoid confusion. This is also accepted by the Central Board of Direct Taxes (hereafter “CBDT”) in its Notification dated June 30, 2022, where it states that an NFT means a token that qualifies to be a virtual digital asset under 2(47A)(a).

Category 3 – 2(47A)(c)

To deal with the ever-evolving nature of the crypto industry, the Central Government is given the power to notify any other digital asset as a VDA. The Central Government has not notified any other digital asset as a VDA.

Exclusions from virtual digital assets

Under the proviso to Section 2(47A), the Central Government has the power to notify and exclude any digital asset from the definition of a VDA. In exercising such power, the CBDT has excluded the following digital assets:

  • Gift cards or vouchers that may be used to obtain goods or services or a discount on goods or services.
  • Mileage points, reward points or loyalty cards given without direct monetary consideration under a programme may be redeemed to obtain goods or services or a discount on goods or services.
  • Subscription to websites, platforms or applications. 

Section 2(47A)(a) defines VDA as “any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means……”. It is clear that a central bank digital currency issued by Central Banks would not fall within the definition of a VDA.

However, the definitions of “currency,” “Indian currency,” and “foreign currency” under the Foreign Exchange Management Act of 1999 make no distinction between a currency issued by the Central Bank and a currency issued by a private entity. Thus, it is not clear whether stable coins like Tether (USDT), Circle USD (USDC), Binance USD (BUSD), MakerDAO’s USD (DAI), and TrueUSD (TUSD), all being digital US dollars issued by private entities, would fall within the meaning of VDA or not. TUSD has already secured the status of a legal tender in Dominica, a Caribbean country. Since countries like El-Salvador and the Central African Republic have granted BTC the status of a legal tender, it is not clear whether it would fall under the exclusion of “foreign currency.”. CoinDCX, a leading crypto exchange operating in India, has taken the view that stable coins are also VDAs.

Rate and method for taxation of income from virtual digital assets

Income from transfer of VDA

The method for calculating income from the transfer of VDA and the rate of tax is given under Section 115BBH. The term “transfer” is defined under Section 2(47) and, therefore, 115BBH is attracted only upon sale, exchange, relinquishment of a VDA, extinguishment of any rights in a VDA, compulsory acquisition of a VDA under any law, or conversion of a VDA held as an investment into stock-in-trade.

The text of Section 115BBH can be viewed here. From a perusal of Section 115BBH, it may be seen that it is a fairly straightforward provision. Subsection 1 provides the rate of tax to be 30% for income from VDA. Subsection 2 provides a method for the calculation of income. Both of these subsections override all other provisions of the Income-tax Act, 1961.

  • The rate of tax of 30% applies to all forms of income from transfer of VDA, irrespective of the head of income under which it is offered for taxation.
  • Slab benefit is not allowed for VDA income.
  • The only deduction allowable from VDA income is the cost of acquisition of VDA.

Thus, an entity engaged in the trading of VDA shall not be allowed to take deductions from operating business expenses, even if the VDA income is its operating income.

The cost of acquisition in the context of capital assets, as judicially defined, means all costs incurred to acquire the asset. Thus, brokerage paid on purchase shall also form part of the cost of acquisition.

The period of holding of VDA makes no difference, as the benefit of cost indexation is not available. No allowance or set off of any loss shall be allowed against VDA income.

Thus, if a person executes 10 VDA trades, makes an aggregate profit of Rs.10,000 on 6 trades, and makes a loss of Rs.6,000 on 4 trades, he is required to pay tax on Rs.10,000 without setting off the loss of Rs.6,000.

  • Unlike deduction and allowance, Section 115BBH does not restrict the allowability of rebates. Thus, rebates under Section 87A may be allowed.
  • Losses on VDA cannot be set-off against any other income.
  • Losses on VDA cannot be carried forward to future years.

Any other income from VDA

As seen earlier, Section 115BBH applies only in the case of “transfer” of VDA. VDA income arising otherwise through the transfer of VDA is taxed under the general provisions of the Act. Such income includes airdrop, staking, yield farming, interest on lending VDA, and dividends.

A business entity earning these types of income as part of its operating activity can claim deductions for business expenses. The provisions of Section 28 – 44DB shall apply. Business losses can be set off and carried forward as in the case of any other business.

In the case of any person other than a business entity, these incomes are taxed under residuary Section 56(1) as “income from other sources.” A deduction of expenses can be claimed in accordance with Section 57.

Gifting VDA / Transferring VDA below the fair market value

Taxability in the Hands of Transferee / Recipient

The meaning of “property” under Section 56(2)(x) has been amended to include VDA. Therefore, where any VDA is gifted or transferred below its fair market value (hereafter “FMV”) to any person, the receiver will have to pay tax on such VDA as explained below:

TransferorAny person
TransfereeAny person
Asset transferredAny VDA
VDA gifted for free and FMV greater than Rs. 50,000Taxable income of the transferee:The fair market value of VDA.
VDA was transferred below FMV, and the difference between FMV and transfer value is greater than Rs. 50000.Taxable income of the transferee:FMV – Transfer Value of VDA
Applicability of 115BBH.Not applicable.

No tax is levied if the transferee receives VDA through one of the modes specified in proviso to section 56(2)(x), i.e., from relatives, on the occasion of marriage, etc.

Section 115BBH would not apply to the person receiving a taxable VDA gift. This is because income arises in the hands of the recipient upon receiving VDA for inadequate consideration and not the transfer of VDA. Therefore, it will be taxed under the normal provisions of the Act.

Taxability in the hands of transferor

Where a VDA held as a capital asset is gifted by a person, such a gift is not considered a transfer under Section 47(iii). Therefore, no tax is payable by the transferor.

In cases where a VDA is held as stock in trade and is gifted, no tax is payable by the transferor.

Where a VDA, held as a capital asset or a stock in trade, is transferred for a value below its FMV, the gains will be computed only on the basis of the transfer value and not the FMV.

Reporting VDA income in ITR

Type of IncomeBusiness Entity: Section and Schedule in ITRNon-Business Entity: Section and Schedule in ITR
Trading income, Derivative incomeSection115BBH – Schedule VDASection 115BBH – Schedule VDA
Airdrop, Staking, Yield Farming, Interest, Dividend, etc.Section 28 to 44DB – Schedule BPSection 56(1) – Schedule OS
Taxable Gift of ReceiverSection 56(2)(x) – Schedule OSSection 56(2)(x) – Schedule OS

If VDA is held on any exchange, it is advised that holdings should be reported in Schedule FA as the status of VDA is unclear. Failure to report foreign assets in Schedule FA invites a stringent penalty of INR 10 lakh.

TDS on Transfer of Virtual Digital Assets

To capture transactions involving the sale of crypto assets and widen the tax base, the legislature introduced Section 194S. The text of Section 194S can be viewed here. From a perusal of the section, it may be seen that the following transaction is covered under the provision:

Buyer / PayerAny person
Seller / PayeeAny resident
TransactionTransfer (sale, exchange etc.) of VDA
When tax deductibleCredit to seller’s account, or actual payment, whichever is earlier
ConsiderationIn cash, kind, or any other VDA
Rate of TDS1% (on value excluding GST)
No TDS requiredWhen buyer is a “specified person”:Aggregate consideration does not exceed Rs.50,000 in a financial year. Other buyers:Aggregate consideration does not exceed Rs.10,000 in a financial year.

“Specified person” means an individual or HUF.

  • that does not have any PGBP income.
  • that has PGBP income but turnover does not exceed 1 crore in case of business or 50 lakh in case of profession in year preceding the year in which VDA is transferred.

A separate category of “specified person” is created to give some relief to small buyers. These small buyers are required to deduct TDS only when they purchase a VDA worth more than Rs. 50,000 in a year. Further, if these buyers are required to deduct TDS, they are not required to apply for TAN under Section 203A. Further, they are also exempt from the applicability of 206AB.

Practical challenges in application of 194S

Generally, TDS provisions are applicable only to entities having sufficient knowledge of the Act and the infrastructure to comply with the provisions. This is because failure to comply with TDS provisions attracts penalties and, in some cases, even criminal prosecution. Though CBDT has issued Circular 13/2022 and Circular 14/2022 to address difficulties in the application of 194S, the provision still poses significant practical challenges. Some of these are discussed below:

  • This section imposes a TDS liability on any person buying VDA. A person buying any VDA on any exchange would be required to first deduct TDS of crypto exchange before releasing payment to exchange. This is highly unreal because a buy trade would never be executed unless the market price was released by the buyer. The buyer will have no opportunity to withhold TDS.
  • A study carried out by CoinSwitch in 2022 revealed that 45% of crypto investors are aged between 18-25, 34% are aged between 26-35. The process of setting up an account with a crypto exchange is far easier in comparison to stock exchanges, with little or no requirement for KYC. To expect these young individuals to comply with TDS provisions whenever they are buying crypto assets either on exchange or peer-to-peer, is too idealistic.
  • Obtaining PAN of sellers is a very difficult task, especially in peer-to-peer trades.
  • Though the section is applicable only in the case of resident sellers, there are no easy means to obtain proof of residential status. The buyer does not know whether he is dealing directly with a non-resident foreign exchange or their resident Indian counterpart.
  • Most of the trading pairs on crypto exchanges are VDA / VDA. If stable coins are also considered a VDA, in almost every transaction, buyer and seller will have to deduct each other’s TDS on a single transaction. Example: A person buys Bitcoin (BTC) with a stable coin called Tether (USDT). Here, the buyer is a buyer of BTC and seller of USDT. The exchange is buyer of USDT and seller of BTC. Thus, buyer will deduct TDS from USDT and exchange will deduct TDS from BTC on the same transaction. This is also explained in Circular 13/2022.
  • Circular 13/2022 goes beyond the language of Section 194S and states that the exchange can discharge a buyer’s liability under TDS if there is an agreement between the buyer and seller. In a practical scenario, no exchange will undertake to discharge a liability not imposed by the statute.


The crypto industry, across the globe, is an unregulated area. Even the most developed nations are struggling to find a way to regulate it. This is because crypto is a fully digital asset and is not restricted by sovereign boundaries. It is an asset that has its genesis in anonymity. Entry into the crypto industry is free and transacting on blockchain requires no KYC. Further, centralised crypto exchanges do not give proper contract notes with all details. Asset swaps on decentralised exchanges go through a web of smart contracts that can’t be easily deciphered. The legislators must understand the complex nature of the industry.

Under these circumstances, the Indian Parliament has introduced a law that taxes crypto gains at the highest rate of tax without indexation or slab benefit. VDA losses are not allowed to be set off against VDA gains and cannot be carried forward. No formal instructions are issued to the tax officers on how to deal with VDAs during assessments. The TDS provisions are so onerous that it is difficult even for exchanges to implement them. Wider issues, like the situation of VDA, remain unaddressed. It is hoped that such a tax law will not stifle crypto innovation in the country.



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