Navraj Singh 

Cryptocurrency started in India as a “regulatory grey zone,” but taxation has made one thing unambiguous: the State will tax it—aggressively—whether you treat it as an investment, a side hustle, or a full-time trading business. The big academic question (and the one your syllabus loves) is classification: is crypto taxed like capital gains, business income, or something else entirely? In 2022, Parliament effectively answered: crypto sits in a special regime built around the concept of a “Virtual Digital Asset” (VDA) and taxed under a dedicated charging and withholding architecture.

This blog explains that regime, why it was designed the way it was, where traditional heads of income still matter, and what the approach looks like when judged against the principles of taxation—equity, certainty, convenience, neutrality, and administrative efficiency.

1) The starting point: What exactly is a “Virtual Digital Asset”?

The Income-tax Act now defines “virtual digital asset” in Section 2(47A) in broad terms—covering tokens generated via cryptographic means, NFTs, and any other digital asset notified by the Government, while excluding Indian and foreign currency.  The breadth is intentional: lawmakers wanted to avoid a loophole where a new token design escapes tax simply because it is not named “crypto.”

This definition matters because it drives everything downstream: rate, deductions, loss set-off, and TDS obligations. It also supports an important conceptual move in tax policy: instead of fighting endless debates on whether crypto is “currency,” India treats it as an asset class for tax purposes. A recent Madras High Court report also reflects courts increasingly describing crypto as a form of “property” in legal disputes, reinforcing the asset framing.

2) The core answer: India created a special regime (Section 115BBH)

The heart of the framework is Section 115BBH, which taxes income from transfer of VDAs at 30% (plus applicable surcharge/cess), regardless of holding period. In other words, the classic capital gains distinction between short-term and long-term becomes largely irrelevant for VDAs under this section.

Two features make 115BBH “special” (and harsh):

First, deductions are heavily restricted—generally only the cost of acquisition is allowed.  Second, losses from transfer of VDAs cannot be set off against any other income, and they cannot be carried forward.

Mini case study: The “investor” who discovers losses don’t behave like losses

Asha buys a token for ₹2,00,000 and sells it later for ₹1,20,000 (₹80,000 loss). In equity taxation, she might set that loss off against other capital gains or carry it forward. Under 115BBH, she generally cannot set off that ₹80,000 VDA loss against salary, business profits, or even other gains outside VDAs, nor can she carry it forward.  The tax system is explicitly telling her: “We’ll tax the upside, but we won’t share the downside.”

From a principles perspective, this is a trade-off. It improves administrative simplicity (fewer set-off games, fewer complex computations), but it creates fairness concerns under equity because it asymmetrically treats gains and losses.

3) TDS on crypto: Section 194S and why the “paper trail” is the real policy

The second pillar is Section 194S, which requires 1% TDS on consideration for transfer of VDAs, subject to thresholds (commonly ₹10,000; ₹50,000 for specified persons) and practical rules for exchanges and peer-to-peer transactions.

This provision is not mainly about revenue (1% is small). It is about information: forcing trades into an auditable channel and letting the tax department map who traded, how often, and at what volume.

Mini case study: The high-frequency trader who gets “tax friction”

Rohan day-trades crypto with 200 trades a month. Even if he ends the year nearly flat, the 1% TDS applies on each eligible transfer, creating cash-flow lock-in and trading friction. The tax burden may not be 1% of profits—it can feel like 1% of volume, which is huge for high turnover.  This is policy by design: India is discouraging churn and simultaneously building traceability.

In terms of certainty, 194S is clear. In terms of convenience, it can be painful for active participants. In terms of administrative efficiency, it is excellent—platforms and payers become enforcement allies.

4) Capital gains vs business income: does the debate still matter?

If 115BBH taxes “income from transfer of VDA,” you might think the capital-vs-business debate is dead. Not fully.

It matters in at least three ways:

1. Accounting treatment and compliance posture: Traders often maintain books, inventory-like treatment, and professional expense claims. But 115BBH restricts deductions anyway, limiting the practical advantage.

2. Non-transfer crypto income streams: mining, staking rewards, airdrops, referral rewards, and creator income can raise head-of-income questions.

3. Characterisation for non-115BBH parts of the Act: such as receiving VDAs without consideration (gift taxation), or business-related GST implications in service fees charged by exchanges.

Put simply: India has made “transfer profits” special, but the ecosystem creates income in other ways where classification still matters.

Mini case study: Staking rewards—transfer gain or “other income”?

Meera stakes tokens and receives periodic rewards. When she later sells those reward tokens, the sale proceeds can fall under the VDA transfer regime, but the initial receipt may be argued as income at receipt time depending on facts and guidance. India also amended provisions relating to VDAs being included in “property” for certain deeming provisions discussed in professional commentary.  The practical takeaway is: crypto taxation is not just about “buy low, sell high.” It’s about tracking how tokens arrive and when value is recognized.

5) Gifts, NFTs, and the “creator economy” angle

The VDA definition explicitly includes NFTs (and similar tokens).  This brings digital art and creator activity into the tax base.

Mini case study: NFT creator vs NFT flipper

Kabir mints an NFT and sells it for ₹3,00,000. For him, it looks like business/professional receipts (creative work monetized). Simultaneously, Sana buys NFTs from multiple collections and flips them weekly—high frequency, profit motive, speculative posture. Under the Indian approach, when the NFT is transferred, the 115BBH framework pulls the gain into the special regime, but the broader story (creator receipts, valuation, platform fees, foreign buyers) still requires careful compliance thinking.

This is where “principles of taxation” becomes visible. The law aims for neutrality (tax digital assets like assets), but creators face complexity in valuation, records, and cross-border receipts—raising issues of convenience and certainty in real life.

6) The GST angle: still evolving, but the direction is clear

GST on crypto in India is less settled in the public mind than income tax. What is more commonly discussed is that crypto exchanges charge fees, and those fees are treated as a taxable supply of services with GST implications (often discussed at 18% in industry explainers).

You should be careful in academic writing here: unlike 115BBH and 194S (which are explicit statutory provisions), GST treatment is often pieced together from analysis, practice, and evolving interpretations. Still, the policy logic is consistent: if an exchange provides a facilitation/platform service, GST can attach to the service fee as consideration for supply.

From a principles perspective, taxing exchange services under GST supports neutrality (financial intermediation-like services taxed when they are not pure currency exchange) and administrative feasibility (platforms are easy to regulate). But uncertainty remains around edge cases—DeFi, peer-to-peer facilitation, offshore platforms, and whether any parts resemble “money” treatment.

7) Evaluating India’s crypto tax policy using principles of taxation

Equity: The regime taxes gains at a flat 30% and restricts loss offsets. This can be seen as harsh and arguably regressive for small investors who cannot smooth losses across years.

Certainty: On transfers, certainty is high—VDAs, 30% rate, minimal deductions, no set-off, 1% TDS.

Convenience: Compliance burden is real, especially with frequent trading due to 194S cash-flow friction and record-keeping expectations.

Neutrality: The regime is arguably non-neutral relative to equities/other assets because it intentionally discourages speculation by denying loss set-off and applying a flat high rate. That may be a deliberate “sin-tax-like” posture rather than a neutrality goal.

Administrative efficiency: The combination of TDS trail + flat tax + limited deductions is extremely enforcement-friendly.

My blunt assessment: India’s crypto tax approach is less about fine doctrinal classification (capital vs business) and more about containment + traceability. It treats crypto as a taxable asset category but designs the system to deter high-frequency speculation and make non-compliance difficult.

Conclusion

So, is crypto taxed as capital gains, business income, or a special regime? The most accurate answer is: India has built a special VDA regime for transfers—anchored by Section 115BBH for a flat 30% tax and Section 194S for 1% TDS—and then lets the rest of the ecosystem (gifts, creator income, platform services under GST, staking/mining-like receipts) fall into traditional analytical work where facts matter.

For an assignment, this topic scores because it lets you show: (i) statutory grounding, (ii) policy reasoning, and (iii) principles-based evaluation. The real intellectual move is noticing that India’s crypto taxation is not trying to “fit crypto into old boxes”—it is building a new box and using tax design as regulation by other means.

References

1. Income Tax Department (India), text of Section 115BBH (Tax on income from virtual digital assets).

2. Income Tax Department (India), “Section 115BBH” viewer page (statutory content).

3. Income Tax Department (India), tutorial PDF on TDS under Section 194S (rate/threshold basics).

4. Indiankanoon, Section 2(47A) definition of “virtual digital asset” (quoted statutory text).

5. ICSI publication discussing VDAs and related direct tax provisions (definition/overview).

6. Taxmann explainer on VDA taxation (overview of 115BBH features).

7. ClearTax explainer on GST on supply of crypto/digital assets (industry interpretation; use with caution as secondary).

8. Times of India report summarizing Madras HC observations treating crypto as property (legal context).