Taxation of Virtual Digital Assets (VDAs) in India: Understanding and Calculating Capital Gains
CA Navin Singhal
CA Navin Singhal is a versatile professional with diverse experience in various fields, including:
– Valuation expertise in Insolvency and Bankruptcy cases as a junior valuer
– Statutory audit of listed and unlisted companies
– Stock and receivable audit
– Leadership role in internal audit teams
– GST audit for individuals and companies
His broad range of experience has equipped him with a unique understanding of various aspects of accounting, auditing, and valuation.”
Virtual Digital Assets (VDAs)—such as cryptocurrencies, tokens, and NFTs—have become important not only in investing but also in regulation and taxation. India, through recent Finance Acts, introduced Sections 115BBH and 194S in the Income‐Tax Act, 1961, to specifically address taxing income from VDAs. Understanding how these work is essential for correct compliance, reporting, and optimizing your tax position.
In what follows, I will explain:
- What the relevant law says (definitions, scope, key constraints)
- How to calculate gains / taxable income from VDA transfers
- Practical examples
- Special cases (airdrops, mining, gifts, etc.)
- Reporting, TDS, and pitfalls to avoid
1. Legal Framework: Sections 115BBH & 194S
To properly calculate, you must know what the law requires. Key points:
a. Section 115BBH (inserted by the Finance Act, 2022) deals with tax on income from the transfer of VDAs. From 1 April 2022 (FY 2022–23 / AY 2023–24), income from transferring VDAs is taxable at a flat rate of 30%.
b. Under 115BBH:
- Only the cost of acquisition is allowed as a deduction. No other expenses (like fees, commissions, gas, transaction costs, etc.) can be deducted.
c. There’s no differentiation for short‐term vs long‐term holdings: whether you held the coin for days or years, the rate is the same.
d. Section 194S: Tax Deducted at Source (TDS) on VDA transfers. Key details:
- From 1 July 2022, whenever there is a transfer of a VDA, and the consideration (sale proceeds, etc.) exceeds certain thresholds, 1% TDS must be deducted.
- The buyer or the person making payment of the proceeds (or the exchange, etc.) is responsible for this.
- The thresholds depend on whether the payee is a “specified person,” etc., but the point is: large or smaller transactions both may trigger TDS.
e. Definition of VDA: Section 2(47A) of the Income Tax Act defines what counts as a VDA — broadly, any cryptographic or digital token/information/code which represents value, etc., excluding Indian currency or foreign currency.
2. How to Calculate Gains / Taxable Income from VDA Transfers
Step A: Gather transaction data
For each transaction where you transfer a VDA (i.e., you sell it, swap it, convert it to INR, or otherwise dispose of it), you need:
a. Date you acquired the VDA
b. Cost of acquisition (in INR) — how much you paid originally (including purchase price in crypto purchases or fair value if received)
c. Date of transfer/sale (or swap/disposal)
d. Sale/transfer value in INR (i.e., how much you got)
e. If TDS was deducted, then how much (so you can credit that)
Step B: Compute the gain for each transfer
For a given VDA where you transferred it, the gain is:
Gain = Sale/Transfer Value (in INR) − Cost of Acquisition (in INR)
a. If the result is positive, that’s your taxable gain under 115BBH.
b. If negative (i.e., a loss), this loss is recorded, but it has limited use (more on this later).
Step C: Sum gains for the financial year
Add up all your gains from all such transfers in the financial year. Losses don’t reduce other income and cannot be carried forward, so for tax computation, only positive gains matter (except that losses might matter in reporting or internal calculation, but not for reducing taxable other income).
Step D: Apply tax rate
a. The flat rate is 30% on the gain.
b. On top of that, you add applicable surcharge & cess, as per whatever tax regime is in effect. Usually, there is a 4% health and education cess. (So effectively slightly more than 30% in many cases.)
Step E: Account for TDS
a. If TDS under Section 194S was deducted at source, that reduces your tax payable. You should get a TDS certificate or see it in Form 26AS, so you can subtract the TDS from your total tax liability.
3. Reporting, ITR Forms, TDS & Compliance
Knowing how to compute is only part; properly reporting, matching with TDS records, and making sure there are no gaps is equally important.
a. ITR form: Crypto/VDA gains must be reported under Schedule VDA in the Income Tax Return. Also, depending on your overall income and whether crypto is part of business/trading, you may need ITR-2 or ITR-3.
b. Head of income: Income under 115BBH is treated under “Income from Other Sources” in many cases. If crypto trading or business is predominant, sometimes business income classification is used. But transfer of VDA is always taxed under 115BBH if it qualifies.
c. TDS Reporting: Make sure you get Form 26AS updated with the 1% TDS, collect TDS certificates if any, so you can claim the credit.
d. Records to maintain:
- Dates of acquisition and sale/transfer
- INR values at those dates
- Exchanges/wallet statements
- Proofs of cost, receipts, etc.
e. Mismatch risk: If reported gains/income don’t match what exchanges possibly report, or TDS doesn’t match your Form 26AS, you may receive a notice from the IT department. So reconciliation is important.
4. Pitfalls & What You Cannot Do
To avoid surprises or incorrect filings, here are common mistakes or assumptions that are not allowed under the current law.
a. Claiming deductions other than cost of acquisition: No deductions for transaction fees, gas, mining electricity, etc., when computing gain under 115BBH.
b. Offsetting losses:
- Losses from VDA transfers cannot be set off against other income (e.g., salary, business income).
- Losses cannot be carried forward to future years for VDAs under Section 115BBH.
c. Assuming long-term benefit: Unlike for other assets (e.g., equities or real estate), holding for longer doesn’t give a preferential tax rate. It’s always flat 30%.
d. Ignoring TDS: If the exchange or buyer doesn’t deduct TDS, you still are liable; absence of TDS doesn’t remove your liability.
e. Not using the correct ITR / schedule: Reporting under the wrong head or wrong schedule can cause issues.
f. Transferring from wallet (peer‐to‐peer) without proof: These must be well-documented.
5. Summary: Step-by-Step Calculation Checklist
a. List all VDA transfers in the year: date, asset, units, cost (INR), sale value (INR), whether TDS deducted.
b. For each transfer, compute gain = sale value − cost of acquisition. Discard negative results for purposes of tax calculation (though record them).
c. Sum up all positive gains.
d. Compute tax = 30% × total gains + surcharge/cess.
e. Subtract any TDS already deducted under 194S.
f. Report in Schedule VDA in your ITR. Use the correct ITR form (ITR-2 or ITR-3, depending on whether crypto transactions are business/trading in nature).
g. Maintain your backup documentation, reconcile with 26AS, and ensure no mismatch.
6. Why This Matters / Real Life Implications
a. Even if cryptocurrency is considered “just another asset,” the stricter rules under Section 115BBH render many conventional strategies (holding long-term for tax benefits, offsetting losses, deducting transaction costs) invalid.
b. Record-keeping is more important than ever: since deductions are limited and losses can’t be carried forward, you need precise cost and acquisition date info.
c. The TDS requirement means even when you don’t expect to owe big taxes, there will be deductions and paperwork. If not reconciled, it could lead to notices.
7. What to Watch Out For / Recent Updates
a. GST: There have been updates regarding GST on services by crypto platforms (platform fees, commission, etc.), though that is separate from income tax; it adds to your cost of using platforms.
b. Crypto F&O / derivatives: As mentioned earlier, whether these are covered by 115BBH depends on whether they represent transfers or delivery of the VDA or just contracts settled differently. Interpretation is still evolving.
c. Enforcement: The tax authorities are more actively checking VDA transactions. Exchanges may be required to report detailed transaction data. It’s better to maintain good documentation.
Conclusion
Calculating capital gains (or more accurately, VDA-transfer gains) under Indian law involves:
- Identifying all transfers of VDA in a financial year
- Computing individual gains = sale value minus cost of acquisition
- Sum only positive gains (since losses cannot reduce tax liability under other heads)
- Applying the flat 30% rate + cess/surcharge
- Accounting for any TDS already deducted
- Reporting correctly in ITR using the proper schedule
While the law simplifies some aspects (single flat rate, no long/short term distinction), it also removes many benefits common in other investment regimes (like set-offs, carry forwards, deductions). Being precise with records and understanding what counts (and what doesn’t) is critical.
For any clarifications or queries, please feel free to reach out to us at admin@fintracadvisors.com
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