Taxation of Cryptocurrency & VDAs: Sections 115BBH & 194S

1. Introduction

With the rapid rise of cryptocurrencies and digital assets in India, the government of India had introduced a robust tax framework to regulate this emerging asset class. The Finance Act, 2022 brought Virtual Digital Assets (VDAs) under the ambit of taxation through Section 115BBH and Section 194S of the Income Tax Act, 1961. These provisions apply to cryptocurrencies, NFTs, and other blockchain-based tokens.

This article provides a detailed overview of the tax treatment, compliance requirements, and practical implications for the assessee dealing in VDAs.

2. What is a Virtual Digital Asset (VDA)?

As per Section 2(47A) of the Income Tax Act, a VDA includes:

• Cryptocurrencies (e.g., Bitcoin, Ethereum)
• Non-Fungible Tokens (NFTs)
• Any other digital asset notified by the government

This broad definition ensures that all forms of digital tokens and blockchain-based assets are covered under the tax net.

3. Section 115BBH – Tax on Income from Transfer of VDAs

Introduced w.e.f. April 1, 2022, this section governs the income tax liability on profits from the transfer of VDAs.

Key Provisions:

1.Flat Tax Rate:

• • Income from transfer of VDAs is taxed at a flat rate of 30%.
  • No distinction between short-term or long-term holding.

2. No Deductions Allowed:

• • Only the cost of acquisition can be deducted.
  • No deduction for mining costs, transaction fees, or other expenses.

3. No Set-Off or Carry Forward of Losses:

• • Losses from VDA transactions cannot be set off against any other income.
  • Losses cannot be carried forward to future years.

4. No Indexation Benefit:

• • Inflation adjustment of cost is not permitted.

Example:

If you bought Bitcoin for ₹1,00,000 and sold it for ₹1,50,000:

• Gain = ₹50,000
• Tax = ₹15,000 (30% of ₹50,000)
• No other expenses can be deducted.

4. Section 194S – TDS on Transfer of VDAs

To ensure traceability and compliance, Section 194S mandates Tax Deducted at Source (TDS) on VDA transactions.

Applicability:

• 1% TDS on the sale consideration of VDAs.
• Applies when:
  • A resident receives payment for transfer of a VDA.
  • The transaction value exceeds ₹50,000 (for payments made by specified persons*) or ₹10,000 (for payments made by others).

* As per the Explanation to the section, “specified persons” means a person –

(a) being an individual or a HUF, whose total sales, gross receipts or turnover from the business carried on by him or profession exercised by him does not exceed one crore rupees in case of business or fifty lakh rupees in case of profession, during the financial year immediately preceding the financial year in which such virtual digital asset is transferred;

(b) being an individual or a HUF, not having any income under the head “Profits and gains of business or profession”.

Who Must Deduct TDS?

• The buyer of the VDA is responsible for deducting TDS before making payment (peer to peer to P2P transactions)
• In case of exchanges, the platform may deduct TDS on behalf of users.

Compliance:

• TDS must be deposited with the government.
• The seller receives Form 26AS reflecting the deduction.
• Failure to deduct or deposit TDS may attract penalties.

5. Taxation of Other Crypto Activities

Activity	Tax Treatment
Mining Rewards	Taxable as income under “Other Sources”
Airdrops	Taxable at market value on receipt
Staking Rewards	Taxable as income when received
Crypto Received as Salary or Fees	Taxable at fair market value on receipt

6. Common Mistakes to Avoid

• Assuming crypto losses can be adjusted against other gains.
• Ignoring TDS obligations while buying/selling on exchanges.
• Not reporting crypto income in ITR.
• Misclassifying crypto as capital gains instead of VDA.

7. Reporting in Income Tax Return (ITR)

• Use the Schedule VDA in the latest ITR forms.
• Report each transaction with:
  • Date of acquisition and sale
  • Cost and sale value
  • Tax paid and TDS deducted

8. Key Case Law: ITAT Jodhpur Ruling – Cryptocurrencies as Capital Assets

Case Summary:

• Tribunal: Income Tax Appellate Tribunal (ITAT), Jodhpur Bench
• Date: December 17, 2024
• Facts: The taxpayer purchased cryptocurrencies worth ₹5.05 lakh in FY 2015–16 and sold them in FY 2020–21 for ₹6.69 crore.
• Holding Period: Over 3 years
• Issue: Whether the profit should be taxed as income from other sources or capital gains.

Ruling:

• The ITAT held that cryptocurrencies are capital assets.
• Profits from their sale before April 1, 2022 should be treated as capital gains, not income from other sources.
• Since the holding period exceeded 36 months, the gains qualified as long-term capital gains (LTCG).
• The taxpayer was allowed to claim deductions and exemptions available under LTCG provisions (e.g., Section 54F).

Implications:

• Pre-2022 transactions: Can be taxed as capital gains, with applicable benefits.
• Post-2022 transactions: Taxed under Section 115BBH at a flat 30%, with no deductions or exemptions.

9. Important Considerations

• Recordkeeping is critical: Maintain detailed logs of acquisition costs, FMV at receipt, and usage.
• Inventory valuation methods (FIFO, LIFO) may be required.
• Crypto received as payment must be reported as income on the date of receipt.

10. Conclusion

The taxation of cryptocurrencies and VDAs in India is strict and non-negotiable. With flat tax rates, no loss adjustments, and mandatory TDS, the framework emphasizes compliance and transparency. Investors, traders, and platforms must ensure accurate reporting and timely payment of taxes to avoid penalties and scrutiny.

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Disclaimer: The information given in this document has been made on the basis of the tax laws prevailing. It is based on the analysis and interpretation of applicable laws as on date. The information in this document is for general informational purposes only and is not legal advice or a legal opinion. You should seek the advice of the legal counsel of your choice before acting upon any of the information in this document. Under no circumstances whatsoever, we are not responsible for any loss, claim, liability, damage(s) resulting from the use, omission or inability to use the information provided in the document.