Introduction
The taxation of Virtual Digital Assets (VDAs) in India represents one of the most significant legislative interventions in the country's digital asset ecosystem. Through the Finance Act, 2022, Parliament introduced a dedicated tax framework by inserting Sections 115BBH and 194S into the Income Tax Act, 1961. These provisions imposed a flat tax of 30 per cent on income arising from the transfer of specified digital assets and introduced a Tax Deducted at Source (TDS) mechanism on such transactions. Together, they marked India's first comprehensive attempt to address the taxation of cryptocurrencies, non-fungible tokens (NFTs), and similar blockchain-based assets.
Despite their apparent simplicity, these provisions have generated substantial debate among legal practitioners, tax professionals, industry participants, and policymakers. Unlike conventional capital gains taxation, the VDA tax regime departs from established principles of income taxation by restricting deductions, prohibiting the set-off and carry-forward of losses, and imposing transaction-level withholding obligations that affect market liquidity. While the framework has succeeded in bringing cryptocurrency transactions within the formal tax system, it has also raised concerns regarding fairness, compliance costs, and the competitiveness of India's digital asset market.
This article examines Sections 115BBH and 194S from both a legal and practical perspective. It analyses the legislative framework, explains the rationale behind these provisions, evaluates the challenges encountered by investors and businesses, and considers whether the present regime aligns with broader principles of tax policy.
Legislative Background
Prior to 2022, the Income Tax Act did not contain any provisions specifically addressing cryptocurrencies or other blockchain-based assets. Tax authorities generally sought to tax gains arising from digital assets under existing provisions governing capital gains or business income, depending upon the facts of each case. This approach created considerable uncertainty because the legislation had not been designed with decentralised digital assets in mind.
The Finance Act, 2022 sought to eliminate this ambiguity by introducing a separate statutory framework for Virtual Digital Assets. Three amendments were particularly significant.
First, Section 2(47A) introduced a statutory definition of a "Virtual Digital Asset". Secondly, Section 115BBH prescribed a special rate of tax on income arising from the transfer of such assets. Finally, Section 194S imposed a TDS obligation on persons making payments for the transfer of VDAs.
Notably, these amendments were introduced purely within the taxation framework. Parliament deliberately refrained from addressing broader regulatory questions concerning the legality, recognition, or governance of cryptocurrencies. Consequently, the tax provisions neither legalise nor prohibit digital assets. They merely determine how income arising from specified transactions should be taxed.
This distinction remains central to understanding India's approach. The Income Tax Act concerns itself with taxation rather than regulation.
Defining the Taxable Asset: Section 2(47A)
The effectiveness of any taxation framework depends upon clearly identifying the subject matter of taxation. Section 2(47A) therefore introduced a broad and technology-neutral definition of a Virtual Digital Asset.
The provision covers any information, code, number or token generated through cryptographic means or otherwise that provides a digital representation of value and can be transferred, stored or traded electronically. The definition extends beyond conventional cryptocurrencies such as Bitcoin and Ether and encompasses utility tokens, governance tokens, many categories of NFTs, and other blockchain-based digital assets unless specifically excluded by notification.
The drafting technique adopted by Parliament is significant. Rather than preparing an exhaustive list of digital assets, the provision focuses on functional characteristics. This ensures that newly developed blockchain assets can fall within the statutory framework without requiring frequent legislative amendments.
The Central Government also retains the power to notify additional assets for inclusion or exclusion, thereby allowing the statutory framework to adapt to technological developments.
Section 115BBH: A Departure from Conventional Income Tax Principles
Section 115BBH constitutes the substantive charging provision governing income arising from the transfer of Virtual Digital Assets. It provides that such income shall be taxed at a flat rate of 30 per cent, together with applicable surcharge and health and education cess.
Although frequently described as a "30 per cent crypto tax", the provision is considerably more restrictive than a mere rate prescription. Its structure departs in several important respects from conventional principles governing capital gains and business income.
The first distinguishing feature concerns permissible deductions.
Unlike ordinary business taxation, where taxpayers are generally permitted to deduct expenditure incurred wholly and exclusively for earning income, Section 115BBH allows deduction only for the cost of acquisition. All other expenditure incurred in connection with the transaction is expressly disallowed.
Consequently, expenses such as brokerage charges, transaction fees, mining costs, electricity expenditure, internet expenses, infrastructure costs, software subscriptions, professional advisory fees, and other operational expenses ordinarily remain non-deductible, irrespective of whether they were necessarily incurred to generate the taxable income.
This represents a conscious legislative departure from the general principles embodied elsewhere in the Income Tax Act and substantially increases the effective tax burden borne by active market participants.
The Prohibition on Set-Off and Carry-Forward of Losses
Perhaps the most controversial aspect of Section 115BBH lies in its treatment of losses arising from Virtual Digital Asset transactions.
The provision expressly prohibits taxpayers from setting off losses arising from the transfer of one Virtual Digital Asset against gains arising from another Virtual Digital Asset. Furthermore, such losses cannot be adjusted against income computed under any other head, nor can they ordinarily be carried forward to subsequent assessment years.
The practical implications are substantial.
Consider an investor who earns a gain of ₹15 lakh from the sale of Bitcoin but incurs a loss of ₹12 lakh from investments in Ether and Solana during the same financial year. Under the ordinary principles governing capital gains taxation, the taxpayer would generally expect tax liability to arise only on the net gain of ₹3 lakh, subject to the applicable statutory framework.
Section 115BBH produces a markedly different outcome.
The taxpayer remains liable to pay tax on the entire ₹15 lakh gain while the ₹12 lakh loss receives no corresponding tax recognition. The resulting tax burden therefore bears little relationship to the investor's overall economic gain.
This asymmetrical treatment has attracted sustained criticism from tax professionals and industry participants, who argue that the provision departs from the fundamental principle that taxation should ordinarily reflect net economic income rather than isolated profitable transactions.
Moreover, the inability to carry forward losses significantly disadvantages investors operating in highly volatile markets where gains and losses frequently occur across multiple assets within the same financial year.
Fathom Legal advises virtual digital asset businesses, investment platforms, founders and institutional participants on the evolving regulatory and tax landscape, including transaction structuring, exchange compliance, token classification, cross-border regulatory issues and the practical application of India's VDA taxation framework, enabling clients to navigate legal uncertainty while remaining commercially efficient and compliant. Reach out to us at assist@fathomlegal.com or visit www.fathomlegal.com.