FinTechRole of Virtual Digital Assets under India’s Taxation Regime

INTRODUCTION

The emergence of Virtual Digital Assets (VDAs) has reshaped conventional financial systems around the world, and India is no exception. Digital currencies, non-fungible tokens (NFTs), and other blockchain assets have attracted extensive public attention because they have the promise to transform finance and ownership. Seeing this change, the Indian Government announced a special tax regime for VDAs in the Union Budget 2022. This action indicated India’s willingness to regulate the fast-changing digital asset market while making money from its increasing usage.

This blog discusses the place of VDAs in India’s tax system, examining their legal status, taxation, regulatory issues, and overall economic implications. We will also contrast India’s strategy with international trends to gain a complete picture of how digital asset taxation is transforming the financial environment.

UNDERSTANDING VDAs

A VDA refers to any digital representation of value that can be transferred, stored, or traded electronically. VDAs include:

• Cryptocurrencies like Bitcoin, Ethereum, and other digital decentralized currencies.
• NFTs (Non-Fungible Tokens), which are titles of ownership of one-of-a-kind digital objects like art, music, and collectables.
• Any other notified digital asset by the government, providing room for future innovations.

This categorization creates a legal foundation for taxation and regulation while enabling the authorities to maintain pace with developments in technology. The definition is expansive enough to cover newly evolving digital assets like security tokens, decentralized finance (DeFi) products, and stablecoins, which are quickly gaining momentum globally.

LEGAL STATUS OF VDAS IN INDIA

Notwithstanding taxation arrangements, VDAs are unregulated and not recognized as legal tender in India, even though they are not banned explicitly. The Reserve Bank of India (RBI) has always been concerned about cryptocurrencies because of their volatility, risk of misuse in illegal activities, and effect on financial stability. Conversely, certain Government agencies view blockchain technology as a means of financial inclusion and digital innovation.

The ambiguity surrounding the legal status of VDAs creates a challenge for regulatory bodies, businesses, and investors. While taxation ensures compliance and reporting of VDA transactions, it does not equate to formal legal recognition as a currency or financial instrument under Indian law.

The contradictory stance of taxing VDAs without granting them formal legal recognition creates a regulatory grey area that leaves stakeholders in uncertainty. On one hand, taxation mandates compliance, requiring businesses and individuals to report and pay taxes on VDA transactions. On the other hand, the absence of a clear legal framework means that VDAs are not formally recognized as currency or financial instruments, making their legal standing ambiguous. This inconsistency results in significant compliance challenges for businesses, financial institutions, and investors.

Companies or individuals dealing with VDAs struggle with proper financial reporting, as existing accounting standards do not comprehensively cover digital assets. Moreover, regulatory bodies often adopt a fragmented approach, leading to differing interpretations and enforcement measures. Investors, too, face uncertainty regarding legal protections, potential liabilities, and the risk of retrospective regulatory changes, all of which add to the complexity of navigating the evolving digital asset ecosystem in India.

TAXATION OF VDAs IN INDIA

The taxation of VDAs in India was formally introduced in Budget 2022 with two primary tax provisions. While VDAs are not yet granted formal legal recognition, continued amendments in financial bills, such as the proposed Finance Bill 2025, indicate an evolving regulatory stance.

By refining tax policies, imposing compliance requirements, and potentially addressing loopholes, these amendments indirectly legitimize VDAs as a recognized asset class for taxation purposes. Future amendments may further integrate VDAs within the broader financial ecosystem, leading to the establishment of clearer guidelines on classification, financial reporting, and regulatory oversight. As taxation policies evolve, they create a structured framework that, while not granting full legal tender status, acknowledges the growing role of VDAs in the economy and financial markets.

1. Tax on Transfer of VDAs (Section 115BBH)

There is a flat rate of 30% tax for any income from the transfer of VDAs. The provisions are as follows:

• Except for the cost of acquisition, no deductions are permitted.
• Any losses from the VDAs are not able to be offset against other sources of income.
• Applicable to all transactions, whether done through an exchange or peer-to-peer.

This model of taxation is analogous to India’s approach to lottery or gambling wins, demonstrating the Government’s wariness of virtual assets. The imposition of a high 30% tax rate on VDA transactions serves a dual purpose. On one hand, it acts as a deterrent against excessive speculative trading, discouraging short-term, high-frequency transactions that contribute to market volatility. On the other hand, it ensures that any gains generated from digital asset investments are systematically brought within the tax net, thereby contributing to Government revenue.

By taxing VDAs at a rate similar to windfall gains such as lottery winnings and gambling income, the Government aims to regulate the sector while maintaining strict oversight of its financial implications.

2. Tax Deducted at Source (TDS) on VDA Transactions (Section 194S)

A 1% TDS is charged on VDA transactions of over ₹50,000 (on specified persons) and ₹10,000 (on others) in a year. This is intended to:

• Enhance the TDS on VDA Transactions (Section 194S) ensuring tax compliance through monitoring digital asset transactions.
• Establish a record-keeping system for the Government to track VDA activities.

However, it has been deliberated that 1% TDS may have some adverse effect on market liquidity, and deterring high-frequency trades as well as impacting price discovery. Crypto exchanges in India have seen their trading volumes reduced sharply since TDS was put in place as traders move offshore to escape disproportionate taxation.

3. GST Implications on VDAs

While the direct tax treatment of VDAs is unambiguous, GST on VDAs is not clear. Some of the important aspects are:

• When VDAs are regarded as goods, they could be liable to GST at regular rates.
• If VDAs are services, GST may be levied on platform fees and trading commissions.
• Classification of crypto exchanges—whether they are a service provider or enabling a commodity trade—impacts GST applicability.

The Government is likely to clarify GST treatment in future policy revisions.

INTERNATIONAL TAXATION APPROACHES TO VDAs

1. United States

The U.S. classifies VDAs as property to be taxed under capital gains. The rate depends on the period of holding:

• Short-term gains (kept for less than one year) are taxed as ordinary income (up to 37%).
• Long-term gains (more than one year) are taxed at 0%, 15%, or 20%, based on income levels.

The U.S. also has strict reporting requirements, where the exchanges are mandated to report user transactions to the IRS.

2. European Union

The EU is crafting the Markets in Crypto-Assets (MiCA) Regulation to establish a harmonized tax and regulatory framework among member states. A few EU states, including Germany, exclude taxation of crypto profits when assets are held for more than a year.

3. Singapore

Singapore has a crypto-friendly tax policy, with no capital gains tax on VDAs, making it a hotspot for blockchain startups.

4. China

China has gone in the opposite direction by flat-out banning cryptocurrency trading. But China is inculcating its own Central Bank Digital Currency (CBDC), the Digital Yuan, which can potentially have taxation implications in the future.

FUTURE OF VDA TAXATION IN INDIA

For India to balance innovation and compliance, a well-defined taxation framework must be developed. Insights from global best practices can serve as a roadmap for potential improvements:

1. Reducing TDS Rates – Learning from the United States and Singapore

In India, the 1% TDS on VDA transactions has significantly affected liquidity and increased compliance burdens. By contrast, the United States does not impose any transaction-based tax deductions but instead enforces capital gains tax based on holding duration, allowing investors to trade without liquidity restrictions. Similarly, Singapore’s approach, which excludes capital gains tax altogether, promotes a flourishing blockchain ecosystem.
Suggested Reform for India: Revisiting the TDS applicable or adopting a capital gains-based taxation structure would make compliance simpler while ensuring that the market remains liquid.

2. Allowing Loss Set-Offs – Adopting the European Union’s Approach

Currently, India does not allow losses from VDA investments to be set off against gains from other financial assets. In contrast, the European Union follows a more investor-friendly approach, where Germany exempts long-term crypto holdings from taxation if held for more than a year, and most EU nations allow loss set-offs within the same asset class.
Suggested Reform for India: Allowing set-offs of VDA losses against gains from other digital assets would align Indian taxation with international standards and encourage long-term investments rather than speculative trading.

3. Defining GST Rule – Drawing from the EU and U.S. Models

There is no clarity on whether VDAs are classified as goods or services under India’s GST laws. This lack of uniformity creates compliance confusion for exchanges and investors. The European Union’s upcoming MiCA regulations provide a structured approach, classifying digital assets into security tokens, utility tokens, and e-money tokens, each with distinct tax treatments. Similarly, the U.S. applies sales tax on crypto transactions where digital assets are used for purchases but excludes investment transactions from such levies.
Suggested Reform for India: Defining clear GST applicability based on asset classification (e.g., investment assets vs. transactional assets) would eliminate ambiguities and streamline compliance.

4. Framework for Institutional Adoption – Lessons from Singapore and the U.S.

For VDAs to gain mainstream adoption, there must be a well-defined regulatory framework for institutional participation. Singapore has successfully implemented a graded taxation and compliance system, where licensed crypto businesses follow structured financial guidelines, and only high-risk assets attract additional scrutiny. The United States allows crypto-based financial products, such as Bitcoin ETFs, under strict compliance rules, encouraging institutional growth while protecting investors.
Suggested Reform for India: Introducing graded taxation for institutional investors and startups—similar to Singapore and the U.S.—would enhance regulatory clarity, promote responsible investments, and attract foreign crypto enterprises.

AMLEGALS REMARKS

The taxation of VDAs in India marks a pivotal step toward mainstreaming digital assets within the financial ecosystem. By introducing structured tax policies, the Government has laid the foundation for regulatory oversight and revenue generation. However, the current framework—with a 30% flat tax and 1% TDS—while providing clarity, also presents hurdles for investors, businesses, and market liquidity.

A progressive and investor-friendly taxation framework can unlock new opportunities for India’s growing digital asset market. Reducing TDS rates—as seen in developed markets like the U.S. and Singapore—can improve liquidity, allowing traders and long-term investors to participate without excessive tax burdens. Allowing loss set-offs, similar to the European Union’s investor-centric model, would enable retail and institutional investors to better manage risks, boosting confidence in the sector. Additionally, clear GST guidelines on the classification of VDAs as goods or services would reduce compliance ambiguity, encouraging Indian startups to innovate within a well-defined regulatory structure.

By refining its tax policies, India has the potential to position itself as a global hub for blockchain innovation, attracting foreign investments, strengthening digital infrastructure, and fostering financial inclusivity. If the Government strikes the right balance between regulation and investor incentives, VDAs could become a major contributor to India’s financial and technological growth. With tax reforms that support innovation, compliance, and ease of trading, India’s digital asset ecosystem can flourish, offering lucrative opportunities for investors and businesses alike.

– Team AMLEGALS assisted by Mr. Amogh Pandey (Intern)

For any queries or feedback, please feel free to contact rohit.lalwani@amlegals.com or mridusha.guha@amlegals.com