A crypto exchange settles a trade in tokens instead of rupees. A Web3 startup pays a contractor in its own governance token. An investor swaps Ethereum for a stablecoin without ever touching a bank account. Each of these looks like a simple transaction. Each one may also trigger a tax liability that most founders and CFOs haven't priced in.
Section 115BBH gets summarised the same way in almost every article: 30% flat tax, no deductions beyond cost of acquisition, no loss set-off, 1% TDS. By now, most founders and finance teams can recite it. But reciting the rate doesn't tell you whether your token even falls within the section, what happens to a loss on your balance sheet, or who is on the hook when a platform gets the withholding wrong. That's the gap this article tries to close — not what the law says, but what it means for how you build, trade, and structure.
A Tax Designed to Discourage, Not Just Collect
Parliament inserted Section 115BBH through the Finance Act, 2022, effective from AY 2023-24. At the time, the government hadn't taken a formal position on whether crypto was legal, illegal, or something in between. Rather than resolve that question, it chose a different tool: tax the activity heavily without recognising the asset.
That choice explains the shape of the section. The flat 30% rate, the ban on loss set-off, and the refusal to allow any deduction beyond cost of acquisition aren't designed to maximise revenue the way ordinary capital gains rules are. They're designed to discourage participation. A trader who can't net a loss against a gain, carry a loss forward, or deduct exchange fees faces a real cost of participation that an equity or commodity trader simply doesn't.
This changes the question a CFO should be asking. It isn't "how do we minimise our VDA tax" — the section is built to resist minimisation. The better question is: does this activity fall within Section 115BBH at all? Anything outside its scope is taxed under the ordinary rules, with the full toolkit of deductions and set-offs still available.
What Counts as a "Virtual Digital Asset" — and Where the Grey Areas Are
Section 2(47A) defines a VDA broadly: any information, code, number or token generated through cryptographic means or otherwise, capable of being transferred, stored or traded electronically. The CBDT can add or exclude specific assets by notification.
Cryptocurrencies and NFTs are clearly covered. Three other categories are not so clear, and each is a legal question, not an accounting one:
Utility and governance tokens. A token that mainly grants platform access or DAO voting rights looks more like a membership right than an investment. But the statute doesn't carve these out, and CBDT hasn't issued a circular distinguishing utility tokens from investment tokens. Until it does, the safer position is to assume VDA treatment applies unless a specific exclusion exists — and to document, at the time of design, why the token was structured the way it was. That contemporaneous record becomes the first line of defence if the characterisation is ever challenged.
Tokenised real-world assets. If a token represents a claim on gold, real estate, or a receivable, is it the token or the underlying asset that's being transferred for tax purposes? Legislation doesn't say. The answer matters commercially: it decides whether you get ordinary capital gains treatment — indexation, holding-period rules, loss set-off — or the punitive 115BBH regime instead. Any RWA tokenisation structure should carry a reasoned tax opinion on this point before launch, rather than a default assumption either way.
In-kind and DeFi transactions. Swapping one token for another, adding liquidity to a pool, or earning staking rewards all raise the same question: when does "transfer" happen, and what counts as "consideration," when no fiat currency is involved? Section 2(47)'s definition of transfer is broad enough to catch crypto-to-crypto swaps, and CBDT clarifications confirm that TDS under Section 194S applies even to in-kind consideration. The person paying must ensure tax is settled before releasing the asset — a genuinely difficult ask in a peer-to-peer or automated DeFi setting. Until you have specific advice otherwise, treat every swap, wrap, or liquidity deposit as a potential taxable transfer.
The Loss Disallowance Is a Treasury Decision, Not a Filing Footnote
Here's the rule that catches people out: you cannot net a loss on one VDA against a gain on another, even within the same tax year, and losses cannot be carried forward. Treated as a compliance detail, this rule is easy to miss. Treated as a treasury input, it should shape how a company holds and trades digital assets.
Consider a Web3 company that receives part of its revenue in tokens, or an exchange holding proprietary inventory across ten different assets. If one token drops sharply while another rises, there's no relief — the loss simply disappears rather than offsetting the gain or carrying into next year.
Three practical adjustments follow:
Consolidate exposure. Fewer, more liquid positions mean fewer loss-crystallising events scattered across the portfolio.
Sequence disposals deliberately. Realising a loss and a gain in the same period doesn't help you, since they can't offset — so timing needs genuine forward planning, not a year-end scramble.
Model exposure on a gross basis. Stress-test your VDA treasury assuming losses and gains are taxed independently, not netted. The result is materially worse than a simple net-position calculation would suggest.
TDS: A Platform Problem, Not Just a Trader Problem
Section 194S requires 1% TDS on VDA transfers above prescribed thresholds. In practice, the obligation usually falls on the exchange or platform facilitating the trade, not on the individual buyer or seller.
For VASPs and exchanges, this is not a passive withholding function you can bolt on later. CBDT circulars confirm that where consideration is in kind — crypto-for-crypto, or part cash and part kind — the party responsible for paying must ensure TDS is settled before releasing the asset. At any real scale, that requires engineered settlement logic built into the product, not manual reconciliation after the fact.
Getting this wrong doesn't just create a problem for the trader — it creates interest and penalty exposure for the platform itself. TDS engineering should sit on the same requirements list as security and uptime, reviewed by tax counsel alongside engineering, not patched in after launch.
GST Is a Separate Layer — and Often Missed
Income tax deals with gains on the VDA itself. It says nothing about the services wrapped around it. Since mid-2025, GST authorities have taken the position that exchange and platform services — trading facilitation, custody, wallet maintenance, withdrawal processing — attract 18% GST, and that crypto exchanges must register as online service providers regardless of turnover thresholds that would otherwise apply.
Income Tax (Sec 115BBH)
GST
What's taxed
Gains on the VDA itself
Fees for platform services (trading, custody, wallets, withdrawals)
Rate
Flat 30%
18%
Who pays
The person transferring the VDA
The platform, as a registered service provider
Registration threshold
Not applicable
None — mandatory regardless of turnover
The two regimes run on entirely different logic, and every fee line a VASP charges needs its own GST analysis. Cross-border arrangements — a foreign platform serving Indian users, or an Indian platform working with foreign liquidity partners — add import-of-service and place-of-supply questions that many Web3 businesses haven't yet worked through.
The New Income-tax Act: Continuity, Not a Clean Slate
The Income-tax Act, 2025 takes effect on 1 April 2026, replacing the 1961 Act. It's a reorganisation exercise, aimed at reducing drafting ambiguity, not a substantive rewrite. The 30% rate, the loss disallowance, and the TDS mechanism are all expected to carry forward, likely under renumbered sections.
The real risk here is administrative, not legal. Tax teams need to update cross-references in internal policies, engagement letters, and system logic once the new numbering is notified. Don't read "new Act" as a signal of relaxation — enforcement, if anything, is tightening. The tax department is already issuing notices for unreported or misreported Schedule VDA income going back to AY 2023-24.
What This Means for Your Business
Four things matter more than re-reading the statute:
Get a characterisation opinion before launch, not after a notice — especially for utility, governance, or RWA-linked tokens where the statute is silent.
Build TDS settlement into your product architecture if you run a platform facilitating VDA transfers. This is an engineering requirement with legal sign-off, not a compliance patch.
Model treasury and trading strategy around the loss-disallowance rule explicitly, rather than discovering its impact when the year-end numbers come in.
Keep your GST and income tax analysis separate. They answer different questions under different authorities, and conflating them is one of the most common gaps we see across this sector.
The regime rewards precision and punishes assumption. As enforcement tightens and the new Act approaches, the businesses that treat VDA tax as a design constraint — built into product, treasury, and contract decisions from day one — will be the ones that stay ahead of the notices the rest of the industry is currently receiving. As India's digital asset ecosystem continues to evolve, businesses require legal advisors who can navigate not only tax laws, but also the broader regulatory landscape governing blockchain, fintech, payments, data privacy, cybersecurity, and financial services. Fathom Legal advises startups, financial institutions, technology companies, and Web3 businesses on structuring digital asset transactions, ensuring regulatory compliance, managing tax and commercial risks, and building governance frameworks that support sustainable innovation. Our approach combines legal precision with commercial practicality, enabling clients to confidently operate in an increasingly regulated digital economy.
This article is for general informational purposes and does not constitute legal or tax advice. Readers should seek specific advice from qualified counsel before making decisions based on its contents.