Taxation of Virtual Digital Asset

Oct 13, 2025

There has been a phenomenal Increase in the Transactions in Virtual Digital Assets. Further, a market is emerging where payments for the transfer of a virtual digital asset can be made through another such asset.

Meaning of Virtual Digital Assets:

• Any Information or code or number or token generated through cryptographic means or otherwise and can be transferred, Stored or traded electronically,
• A non-fungible token (NFT) or any other token of similar nature,
• Any other digital asset, as the CG may notify.

However Central government may by notification, exclude any digital asset from the definition of Virtual digital asset subject to specific conditions.

Accordingly, CG has notified that the following Virtual digital assets would be excluded from the definition of Virtual Digital Asset

• Gift Card, Vouchers, being a record that may be used to obtain goods or services or discount on goods or services
• Mileage points, Reward points or loyalty card, being a record given without direct monetary consideration under an award, reward, benefit, loyalty, incentive, rebate or promotional program that maybe used or redeemed only to obtain goods or services or discount on goods or services
• Subscription to website or platform or application.

Taxation of Virtual Digital Assets:

a) Taxability of income from transfer of virtual digital assets [Sec 115BBH]

• Tax rate on transfer of virtual digital assets: Where the total income of an assessee includes any income from transfer of any virtual digital asset, such income would be taxed @30% under sec 115BBH.
• No deduction allowed: In computing the income from transfer of virtual digital asset, no deduction allowed under any provision of the Act in respect of any expenditure or allowance except cost of acquisition, if any.
• Set off or carry forward of loss from transfer of virtual digital asset not allowed: Loss from transfer of virtual digital asset would not be allowed to be set off against income computed under any provision of this Act to the assessee and such loss would not be allowed to be carried forward to succeeding assessment years.
• Virtual Digital asset need not to be a capital asset: The definition of “Transfer” under sec 2(47) would apply to any virtual digital asset, whether it is capital asset or not.

b) Taxability of receipt of Virtual Digital Assets as gift or for Inadequate Consideration [Sec 56(2)(x)]

In order to tax gift of virtual digital asset in the hands of the recipient, Sec 56 has been amended to include Virtual Digital Asset within the Definition of “Property”.

Accordingly, if virtual digital asset is received by any person from any person

• Without Consideration: The aggregate fair value of such virtual digital asset on the date of receipt would be taxed as the income of the recipient, if it exceeds Rs 50,000.
• For Inadequate Consideration: If the difference between the aggregate fair value and such consideration exceeds Rs 50,000 such difference would be taxed as the Income of the recipient.

c) TDS on payment on transfer Virtual Digital Asset (Sec 194S)

• Applicability and rate of TDS: Section 194S requires any person who is responsible for paying to resident any sum by way of consideration of more than or equal to Rs 10,000 for transfer of a virtual digital asset to deduct tax @1% of such sum.
• Time of Deduction: The deduction is to be made at the time of credit of consideration to the account of the resident or at the time of payment of such sum by any mode, whichever is earlier.
• In case of Payer being Individual/HUF not having any income under the head PGBP or having business or profession but last year T/O or gross receipts does not exceed Rs 1 crore in case of business or Rs 50 Lakhs in case of profession required to deduct TDS only if consideration is more than Rs 50,000.
• If the consideration for transfer of VDA is wholly in kind or in exchange of Other VDA or it is partly in kind & partly in cash and the cash balance is not sufficient enough to meet the TDS liabilities, then payer shall release the consideration only after ensuring that tax is paid on such consideration.
• If provision of section 194O and Section 194S both apply, then TDS deducted under Sec 194S
• TDS applicable on consideration excluding GST and Commission
• In section 194S specified Person (Ind/ HUF) required to pay TDS within 30 days from end of the month in which TDS deducted along with statement in form 26QE.

GST Implication on Virtual Digital Asset

• VDAs (e.g., crypto, NFTs) are classified as "goods" under GST.
• They are not money or securities as defined under GST law.
• Sale of VDAs is taxable and not exempt under Schedule III of GST Act.
• VDAs can be obtained via crypto exchanges or mining (self-generation).
• Seller must collect and pay GST, regardless of sale method.
• No specific HSN code; HSN 960899 ("other miscellaneous articles") may be used.
• GST rate applicable: 18%.
• GST applies if turnover exceeds ₹40 lakhs or if voluntarily registered.

Transaction through an Exchange

If transaction takes place on or through an exchange, there is a possibility of tax deduction requirement under section 194S at multiple stages. Hence in order to remove difficulties for transactions taking place on or through an exchange, the following clarification have been issued by CBDT:

where the transfer of virtual digital asset takes place on or through an Exchange and the virtual digital asset being transferred is owned by a person other than the Exchange

In this case, buyer would be crediting or making payment to the Exchange (directly or through a broker). The Exchange, then, would be required to credit or make payment to the owner of virtual digital asset being transferred, either directly or through a broker. Since there are multiple players, to remove difficulty it has been clarified that:

X (Buyer)

→

ABC (Exchange)

→

←

Y (Seller & Broker)

1) Tax may be deducted under section 194S only by the Exchange (ABC) which is crediting or making payment to the seller (Y) (owner of the virtual digital asset being transferred). In a case where broker owns the virtual digital asset, it is the broker who is the seller. Hence, the amount of consideration being credited or paid to the broker by the Exchange is also subject to tax deduction under section 194S.

X →

(Buyer)

ABC →

(Exchange)

← XYZ

(Seller & Broker)

2) In a case where the credit/ payment between Exchange (ABC) and the seller (Y) is through a broker (ABC) (and the broker is not seller), the responsibility to deduct tax under section 194S shall be on both the Exchange and the broker. However, if there is a written agreement between the Exchange and the broker that broker shall be deducting tax on such credit/ payment, then broker alone may deduct the tax under section 194S. The Exchange would be required to furnish a quarterly statement (in Form 26QF) for all such transactions of the quarter on or before the due date prescribed in the Income-tax Rules, 1962.