The concept of Virtual Digital Assets (VDAs) and their taxation was formally introduced in India's Income Tax Act, 1961, through the Finance Act, 2022. The subsequent Income Tax Act, 2025 has further solidified and expanded the framework, aiming for greater clarity and regulatory oversight.

Here's a comprehensive breakdown of Virtual Digital Assets and their taxability in India:

What are Virtual Digital Assets (VDAs)?

The Income Tax Act, 1961, specifically Section 2(47A) and Section 2(111) of the Income Tax Bill, 2025, defines "Virtual Digital Asset" broadly. It includes:

• Any information, code, number, or token generated through cryptographic means or otherwise.
• It does not include Indian or foreign currency.
• Key types of VDAs explicitly covered:
• Cryptocurrencies: Such as Bitcoin, Ethereum, Ripple, Solana, etc. These are decentralized digital currencies that use cryptography for security.
• Non-Fungible Tokens (NFTs): Unique digital assets that represent ownership of a specific item (like digital art, music, videos, or even real estate). Each NFT has distinct identification codes and metadata.
  
  

Important Distinction: It's crucial to understand that VDAs are not considered "currency" in India unless they are a Central Bank Digital Currency (CBDC) issued by the Reserve Bank of India. Private cryptocurrencies are treated as assets.

Taxability of Virtual Digital Assets

The Indian tax regime for VDAs is characterized by a high flat tax rate and stringent rules regarding deductions and loss offsets.

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

• Rate: Any income arising from the transfer (sale, exchange, etc.) of a Virtual Digital Asset is taxed at a flat rate of 30%. This rate applies irrespective of the individual's income slab.
• Surcharge and Cess: Applicable surcharge and health and education cess (currently 4%) will be added to this 30% tax, making the effective tax rate even higher.
• No Deductions (Except Cost of Acquisition): This is a key feature. When calculating the income from VDA transfer, no deduction for any expenditure or allowance is permitted, except for the cost of acquisition. This means:
• Transaction fees, mining costs, gas fees, platform commissions, software expenses, internet charges, etc., cannot be deducted.
• Only the price at which you acquired the VDA can be reduced from the sale consideration to arrive at the profit.
• No Indexation Benefit: Unlike other capital assets, indexation benefit (adjusting the cost of acquisition for inflation) is not allowed for VDAs, even if held for a long period.
• No Set-off of Losses:
• Loss from the transfer of a VDA cannot be set off against any other income (e.g., salary, business income, income from other capital gains).
• Crucially, loss from the transfer of one VDA cannot be set off even against profit from the transfer of another VDA. For example, if you lose money on Bitcoin but gain on Ethereum, you cannot use the Bitcoin loss to reduce your Ethereum gain.
• Such losses cannot be carried forward to succeeding assessment years. This "ring-fencing" of VDA losses means a loss on crypto is a complete loss for tax purposes.

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

• Rate: A TDS of 1% is levied on the consideration paid for the transfer of a VDA to a resident.
• Thresholds:
• For specified persons (individuals or HUFs whose total sales, gross receipts, or turnover from business does not exceed ₹50 lakh in the preceding financial year, or who do not have business/professional income), the TDS threshold is ₹50,000 in a financial year.
• For other persons (including individuals and HUFs with higher turnover, or companies, firms, etc.), the TDS threshold is ₹10,000 in a financial year.
• Time of Deduction: TDS is to be deducted at the time of credit of the sum to the account of the resident or at the time of payment, whichever is earlier.
• Consideration in Kind/Exchange: If the consideration for the transfer of a VDA is wholly or partly in kind or in exchange for another VDA, the person responsible for paying such consideration must ensure that the tax has been paid before releasing the consideration. This can be complex, often requiring the deductor to pay the TDS themselves and then recover it from the transacting parties, or through an agreement with VDA exchanges.
• Reporting: Exchanges and other entities facilitating VDA transactions are generally responsible for deducting and reporting this TDS.
• Purpose: The TDS mechanism aims to track VDA transactions and ensure compliance by providing the government with a record of these dealings.

3. Taxation of Gifted VDAs (Section 56(2)(x)):

• If you receive VDAs as a gift, and the aggregate fair market value of such gifts exceeds ₹50,000 in a financial year, the entire fair market value of the VDA will be taxable in the hands of the recipient under the head "Income from Other Sources."
• Exceptions: Gifts received from specified relatives or on certain occasions (like marriage) are generally exempt from this tax.

4. Undisclosed Income and Seizure:

• The Income Tax Bill, 2025, has specifically brought "Virtual Digital Assets" within the definition of "undisclosed income."
• This means that if undisclosed VDAs are discovered during a search or raid by the income tax authorities, they can be taxed at a much higher rate (e.g., 60% plus surcharge and cess) without allowances for deductions or exemptions, similar to other undisclosed incomes.
• Tax authorities have the power to seize VDAs during investigations, akin to physical assets like cash or gold.

5. Reporting Requirements:

• Taxpayers dealing in VDAs are required to report their VDA income in their Income Tax Returns (ITR). A specific "Schedule VDA" is included in ITR forms (ITR-2 and ITR-3, typically not ITR-1) for this purpose.
• VDAs are also required to be included in the Annual Information Statement (AIS), ensuring that all crypto transactions are automatically recorded in taxpayers' financial profiles.