Cryptocurrency Explained: Meaning, How It Works, and Crypto Tax in India
- CA Pratik Bharda
- Jun 3
- 9 min read
Cryptocurrency has emerged as a new form of digital assets that can be transferred, stored, and traded electronically. Popular cryptocurrencies such as Bitcoin, Ethereum, Litecoin, Dogecoin, Ripple, and Matic are now traded across digital platforms worldwide.
In India, cryptocurrencies and certain other digital assets are classified as Virtual Digital Assets (VDAs) under the Income Tax Act. As interest in crypto continues to grow, taxpayers must understand not only what cryptocurrency is and how it works, but also how crypto transactions are taxed and reported.
The taxation framework for VDAs includes a special tax rate on transfers, TDS provisions, reporting requirements, and specific rules relating to gifts, mining, staking, and other crypto-related activities. Understanding these rules can help taxpayers report crypto income accurately and comply with applicable tax requirements.
Table of Contents
What Is Cryptocurrency?
Cryptocurrency is a form of digital currency designed to facilitate transactions for goods and services in a manner similar to conventional currencies. Unlike physical money, cryptocurrencies exist in digital form and are traded through electronic networks. Today, thousands of virtual currencies are traded globally, making cryptocurrency one of the most widely discussed categories of digital assets.
The terms crypto, crypto currency, and cryptocurrency are used interchangeably. They refer to digital currencies that are generated and exchanged using cryptographic technologies.
These digital assets can be bought, sold, exchanged, transferred, or held as investments through various platforms and exchanges. Cryptocurrencies are also recognised within India's tax framework through the broader concept of VDAs. Examples of popular cryptocurrencies include:
Bitcoin
Ethereum
Litecoin
Dogecoin
Ripple
Matic
How Does Cryptocurrency Work?
Cryptocurrency functions through digital systems that allow assets to be stored, transferred, and traded electronically. The Income Tax Act's definition of Virtual Digital Assets also highlights several characteristics that explain how these assets operate within digital environments. It states: “Virtual Digital Assets (VDAs) include crypto assets, Non-Fungible Tokens (NFTs), and any other digital assets…”
How Transactions Work
Cryptocurrency transactions involve the electronic transfer of digital assets between participants. These assets can be:
Bought using traditional currency
Exchanged for other cryptocurrencies
Used for payments
Received as consideration for services
Transferred between parties
Cryptographic Networks and Digital Value
Virtual Digital Assets generally consist of information, code, numbers, or tokens generated through cryptographic means or similar technologies. According to the statutory framework, these assets may:
Represent digital value
Function as a store of value
Function as a unit of account
Be used in financial transactions or investments
How Cryptocurrency Can Be Stored, Traded, and Transferred
These assets can move between participants through digital platforms and may also be used for activities such as:
Staking
Mining-related rewards
Airdrops
What Are Virtual Digital Assets (VDAs)?
Tax on crypto in India is closely linked to the concept of VDAs. The Income Tax Act defines VDAs separately and lays down specific tax provisions for transactions involving these assets. Understanding what qualifies as a VDA is important because the special tax rules applicable to crypto transactions are based on this classification.
Meaning of Virtual Digital Assets
VDAs include various forms of digital assets that are generated, stored, transferred, or traded electronically. Under the Income Tax Act, a VDA may include:
Information, code, number, or token generated through cryptographic means
Notified Non-Fungible Tokens (NFTs)
Other notified digital assets
Crypto-assets that rely on cryptographically secured distributed ledger technology or similar technology to validate and secure transactions
Crypto assets and NFTs are specifically recognised as Virtual Digital Assets for taxation purposes.
What Is Included in a VDA?
The scope of VDAs extends beyond cryptocurrencies alone. Various digital assets can fall within this definition if they meet the prescribed conditions. Examples include:
Cryptocurrencies
Crypto-assets
Non-Fungible Tokens (NFTs)
Fungible tokens
DeFi protocol tokens
Other notified digital assets
What Is Excluded From a VDA?
While the definition of VDAs is extensive, certain assets are specifically excluded from its scope. The following are not treated as Virtual Digital Assets:
Indian currency
Central Bank Digital Currency (CBDC)
Foreign currency
Physical NFTs
Gift cards or vouchers
Reward points or loyalty cards
Website or application subscriptions
Other notified excluded digital assets
Is Cryptocurrency Taxable in India?
The Indian government’s specific taxation framework for VDAs, including cryptocurrencies, covers transfers, trading activities, gifts, mining rewards, staking income, airdrops, and several other crypto-related transactions. Here’s a look:
Transactions That Attract Crypto Tax
A wide range of cryptocurrency transactions fall within the scope of taxation.
The following transactions are generally taxable:
Spending cryptocurrency to purchase goods or services
Exchanging one cryptocurrency for another cryptocurrency
Trading cryptocurrency using INR
Receiving cryptocurrency as payment for services
Receiving cryptocurrency as a gift
Mining cryptocurrency
Receiving salary in cryptocurrency
Staking cryptocurrency and earning rewards
Receiving airdrops
Rate of Tax on Crypto in India
Income arising from the transfer of Virtual Digital Assets is taxed at a flat rate of 30%. The taxable income is generally computed as follows:
Particulars | Amount |
Full Value of Consideration | XXXX |
Less: Cost of Acquisition | (XXXX) |
Taxable Income | XXXX |
Only the cost of acquisition is allowed as a deduction while computing taxable income from the transfer of a VDA. The law does not permit deductions for most other expenses, allowances, or losses relating to the transfer of virtual digital assets. In addition, surcharge and cess applies as per the applicable provisions.
Reporting Crypto Income in ITR
The Income Tax Department has introduced a separate Schedule VDA for reporting income from virtual digital assets. Taxpayers can disclose crypto transactions through:
Schedule VDA in ITR-2: Generally used when cryptocurrency is held as an investment, and the resulting income is reported as capital gains
Schedule VDA in ITR-3: Generally used when cryptocurrency trading is carried out as a business activity, and the income is reported under Profits and Gains from Business or Profession
The Income Tax Department's guidance states that VDA income must be disclosed transaction-wise in the applicable return form. Depending on the activity, crypto income may be reported as:
Scenario | Head of Income |
VDA held as an investment | Capital Gains |
Frequent trading of VDA | Profits and Gains from Business or Profession |
VDA received through gifts, airdrops, etc. |
Tax Treatment of Different Crypto Transactions
Not all cryptocurrency transactions are taxed in the same manner. The tax treatment depends on how the crypto asset is received and whether it is later sold, exchanged, or transferred. Certain transactions may be taxable at the time of receipt, while others become taxable only when the asset is transferred.
Tax on Crypto Gifts
Cryptocurrency received as a gift may be taxable in the hands of the recipient under the provisions relating to gifts. The tax treatment depends on factors such as:
The value of the gift
The relationship between the donor and recipient
The circumstances under which the gift is received
Crypto gifts received from relatives are generally exempt from tax. Gifts received through inheritance, a will, marriage, or in contemplation of death are also exempt. However, if cryptocurrency is received from a non-relative and the aggregate value exceeds ₹50,000, the value may be taxable as Income from Other Sources.
Tax on Airdrops
An airdrop refers to the distribution of cryptocurrency tokens directly to users, usually to create awareness or improve liquidity for a digital asset. Where the tokens have a determinable fair market value at the time of receipt, the value of the airdrop may be taxable under Income from Other Sources.
If the recipient later sells, swaps, or spends the tokens, the subsequent transfer may attract tax under the applicable VDA provisions. In such cases, the value that was taxed at the time of receipt may be treated as the cost of acquisition.
Tax on Crypto Mining
Mining involves validating and recording transactions on a blockchain network. Miners receive cryptocurrency as a reward for performing this activity. Where crypto assets received through mining have a determinable value, the value may be taxable at the time of receipt.
If the mined cryptocurrency is subsequently sold, swapped, or transferred, the gains arising from the transfer may be taxed separately under the VDA taxation framework. Additionally, expenses such as electricity costs and infrastructure costs are typically not considered while determining the cost of acquisition for mined assets.
Tax on Crypto Staking Rewards
Staking involves participating in a blockchain network and earning rewards in the form of cryptocurrency. The rewards earned through staking may be taxable at the applicable slab rates at the time of receipt.
If the staked cryptocurrency or rewards are subsequently transferred, the transfer may attract tax under the VDA provisions applicable to crypto transactions. Moving assets between wallets or transferring assets to a staking pool is generally not treated as a taxable event.
Can Crypto Losses Be Set Off Against Other Income?
The tax treatment of losses from Virtual Digital Assets differs significantly from the treatment applicable to many other investment assets. The law imposes specific restrictions on the adjustment and carry forward of crypto losses. The following restrictions apply to losses arising from the transfer of VDAs:
Loss from one VDA cannot be set off against gains from another VDA.
Loss from a VDA cannot be set off against income under any other head.
Losses cannot be carried forward to future years.
No loss adjustment is permitted against profits arising from VDA transfers.
In addition, taxpayers cannot claim deductions for expenditure incurred in relation to crypto transactions, except for the cost of acquisition. The following example illustrates how the restriction operates:
Cryptocurrency | Purchase Value (₹) | Sale Value (₹) | Profit/(Loss) (₹) |
Bitcoin | 60,000 | 80,000 | +20,000 |
Ethereum | 40,000 | 30,000 | -10,000 |
Although the Ethereum transaction results in a loss of ₹10,000, the loss cannot be adjusted against the ₹20,000 profit earned on Bitcoin. As a result, tax is computed on the entire taxable gain from the profitable transaction in accordance with the applicable provisions governing VDAs.
How to Report Cryptocurrency Income in ITR
Reporting cryptocurrency income correctly is an important part of tax compliance. The Income Tax Department has introduced specific reporting requirements for Virtual Digital Assets, and taxpayers must disclose eligible transactions in the appropriate return forms.
Schedule VDA
Taxpayers are required to disclose VDA transactions separately in this schedule. According to the Income Tax Department's guidance, the disclosure is made on a transaction-wise basis.
Which ITR Form Should Be Used?
The applicable ITR form depends on the nature of the crypto activity. Generally:
Nature of Activity | Applicable ITR Form |
Crypto held as an investment and reported as capital gains | ITR-2 |
Crypto trading reported as business income |
Taxpayers should select the return form that aligns with the nature of their income and reporting requirements.
Maintaining Records for Tax Reporting
Taxpayers should maintain relevant records relating to their crypto transactions, such as:
Trade records
Exchange statements
Contract notes
Profit and loss reports
Transaction histories
Maintaining supporting documentation can assist in accurate reporting and help substantiate disclosures made in the return. Failure to report taxable crypto income or comply with applicable tax provisions may result in interest, penalties, notices from the Income Tax Department, and other consequences under the law.
Taxpayers should therefore ensure that crypto transactions are reported accurately in the applicable return form.
Frequently Asked Questions
1. What is cryptocurrency?
Cryptocurrency is a form of digital currency that can be used to buy goods and services and can also be traded electronically. Examples include Bitcoin, Ethereum, Litecoin, Dogecoin, Ripple, and Matic.
2. What is Bitcoin?
Bitcoin is one of the most widely traded cryptocurrencies in the digital asset market. It is a type of cryptocurrency that falls within the broader category of VDAs.
3. What is crypto trading?
Crypto trading refers to the buying, selling, or exchanging of cryptocurrencies. This may involve trading crypto using INR, exchanging one cryptocurrency for another, or transferring digital assets through trading platforms.
4. How much is crypto tax in India?
Income arising from the transfer of VDAs is taxed at a flat rate of 30%, along with applicable surcharge and cess. While computing taxable income, only the cost of acquisition is allowed as a deduction.
5. Is there a 1% TDS on crypto transactions?
Yes. A 1% TDS may apply on the transfer of a VDA, subject to the prescribed conditions and threshold limits. The applicability depends on factors such as the nature of the transaction and the parties involved.
6. Can crypto losses be adjusted against other income?
No. Losses arising from the transfer of VDAs cannot be set off against any other income. Such losses also cannot be carried forward to future years.
7. Where should crypto income be reported in the ITR?
Crypto transactions must be reported under Schedule VDA while filing the income tax return. Depending on the nature of the activity, taxpayers may be required to use ITR-2 or ITR-3.
8. Are crypto gifts taxable in India?
Crypto gifts may be taxable in the hands of the recipient depending on the value of the gift, the relationship between the donor and recipient, and the circumstances under which the gift is received. Gifts from relatives are generally exempt from tax.
9. Is cryptocurrency legal and taxable in India?
Yes, crypto is legal in India but not considered as legal tender. Cryptocurrency transactions are subject to taxation in India through the VDA framework. The tax provisions cover transfers, reporting requirements, and TDS obligations relating to eligible crypto transactions.
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