Introduction
A recurring issue in cryptocurrency taxation is whether gains or losses from crypto futures and options should be taxed under the special Virtual Digital Asset (VDA) regime of section 115BBH, or whether such transactions fall under the ordinary business / speculative business framework. The distinction is important because the tax rate, deductibility of expenses, loss treatment, TDS implications and ITR reporting can materially differ depending on the true character of the transaction.
The issue must be approached carefully. This is not a matter of free choice. An assessee cannot simply classify crypto income as "normal business" or "speculative business" because one treatment appears more beneficial. The correct position depends on the legal nature of the transaction - in particular, whether there is a transfer of the VDA itself, or whether the assessee is only dealing in a non-delivery price-difference contract linked to crypto.
Statutory starting point: what section 115BBH actually taxes
The VDA regime is triggered by income from the transfer of a virtual digital asset. The official Memorandum explaining the VDA provisions states that income from transfer of VDA is taxed under section 115BBH at 30%, and that no deduction in respect of any expenditure or allowance is allowed except cost of acquisition. The same Memorandum also links section 194S to payment for transfer of VDA. In other words, both the charging and TDS framework are centered on an actual transfer of the VDA itself.
The ITR architecture also supports this distinction. The return rules and validations treat Schedule VDA as the place for reporting income from transfer of VDA taxable at special rates, and the ITR-3 validation rules require consistency between Schedule BP and Schedule VDA where section 115BBH business income is disclosed.
Accordingly, where the assessee is buying and selling the actual cryptocurrency itself - for example, spot or delivery-based Bitcoin, Ether or other crypto assets - the income ordinarily remains VDA transfer income, even if the volume, frequency and commercial organisation of the activity are such that it is shown under the business head in the return. The mere fact that the activity is systematic or business-like does not take it outside section 115BBH.
Why crypto futures and options raise a separate issue
The difficulty arises because a crypto future or option may not always involve delivery or transfer of the underlying crypto asset. In many real-world cases, especially on crypto platforms, such contracts are cash-settled. What the assessee receives or pays is only the difference in price, not the cryptocurrency itself. In such a case, it becomes difficult to say that there has been a transfer of VDA in the statutory sense required by section 115BBH and section 194S.
Therefore, the correct legal question is not whether the underlying reference asset is cryptocurrency, but whether the contract results in actual transfer of the VDA. If the transaction is merely a price-difference settlement, the stronger view is that the VDA special-rate regime is generally not attracted merely because the underlying reference is crypto.
Relevance of section 43(5): when a transaction becomes speculative
This is where section 43(5) becomes important. That provision defines a speculative transaction as a contract for purchase or sale of a commodity, including stocks and shares, which is settled otherwise than by actual delivery or transfer. The same section carves out certain eligible derivative transactions carried out on a recognised stock exchange, so that those do not get treated as speculative.
The practical implication is significant. Ordinary crypto futures or options traded on a typical crypto exchange or offshore platform usually do not fall within the recognised-stock-exchange derivative carve-out contemplated by section 43(5)(d), because that carve-out is framed around the regulated securities / recognised exchange framework. Therefore, where a crypto derivative contract is settled otherwise than by actual delivery and the recognised-exchange carve-out is unavailable, the stronger statutory view is that such income or loss would generally fall within the speculative business framework.
Cash-settled crypto futures and options: better view
On the better legal view, cash-settled crypto futures and options are generally not taxable under section 115BBH merely because the underlying asset is crypto. Since there is usually no transfer of the cryptocurrency itself, the statutory trigger of transfer of VDA is missing. In such cases, the income is more appropriately considered under the head "Profits and gains of business or profession". Further, because the transaction is settled otherwise than by actual delivery and often does not fall within the recognised-stock-exchange derivative exception, it would ordinarily be treated as speculative business income or speculative business loss.
This is, however, a reasoned statutory position, not a point expressly settled by a direct CBDT clarification specifically on crypto futures and options. I did not locate any official CBDT circular or instruction directly stating that crypto F&O on crypto exchanges must always be treated as speculative business or must always be treated as VDA income.
Delivery-based or physically settled crypto futures/options
The position changes where the exercise or settlement of the contract actually results in delivery or transfer of the cryptocurrency itself. In such a case, the underlying event more clearly becomes a transfer of VDA, and the stronger view is that the relevant transfer leg would then fall within section 115BBH. In that situation, the income would be chargeable at the special 30% rate, together with surcharge and cess, and the restrictive VDA computation rules would apply.
Thus, the distinction is straightforward in principle:
- actual transfer of crypto itself → moves toward the VDA regime under section 115BBH;
- cash settlement without delivery of crypto → moves toward the business / speculative business framework.
Whether speculative business is automatically taxable at 30%
A very important correction is required here. Speculative business is not a separate flat 30% tax category by itself. It forms part of the head "Profits and gains of business or profession." The ITR-3 structure separately shows profit and gains from speculative business as part of business income, while income chargeable at special rates is dealt with separately. The return computation also distinguishes tax at normal rates from tax at special rates.
Therefore, for an individual assessee, speculative business income is generally taxed at the normal slab / regime rates, not automatically at 30%. The Income-tax Department's official rate page for AY 2025-26 shows that individual tax rates under the old and default-new regimes range from nil upward, and the 30% rate applies only once the relevant slab threshold is crossed.
For a partnership firm / LLP, the practical outcome is different because the Department's rate page states that such entities are taxable at 30%. Therefore, speculative business income of a firm / LLP may effectively bear 30% tax - but that is because the entity's normal rate itself is 30%, not because speculation business carries an independent special 30% charge.
For a domestic company, the rate again depends on the applicable company regime; the official portal shows company rates such as 25%, 22%, 15% or 30%, depending on the case. Therefore, speculative business does not have a standalone 30% rate as a matter of law.
By contrast, VDA transfer income under section 115BBH is specifically subjected to a flat 30% rate by the statute and the official Memorandum, apart from surcharge and cess. This is why VDA income is a special-rate category, whereas speculative business is ordinarily a normal-rate business category with special loss restrictions.
Core benefit if an activity genuinely falls under speculative business instead of section 115BBH
The principal benefit is not the headline rate. The main advantage lies in the computation mechanism.
Under the speculative business framework, the income is computed through the ordinary business-income structure. The ITR-3 validation rules specifically recognise "Net profit or loss from speculative business" in Schedule BP. That means the normal business-computation framework conceptually applies, including business additions and deductions in accordance with the ordinary scheme of sections 28 to 44DA, subject of course to the facts of the case and general deductibility rules.
By contrast, under section 115BBH, the statute expressly denies deduction of any expenditure or allowance other than cost of acquisition. Therefore, if a transaction genuinely falls outside section 115BBH and instead falls in speculative business, the assessee may have a broader basis to claim genuine business expenditure than would be possible under the VDA special regime.
A second difference arises in the area of loss treatment. A speculation-business loss is restrictive, but it is still recognised within the ordinary business-loss framework. Section 73 provides that a loss in speculation business can be set off only against profits and gains of another speculation business, and the ITR structures separately track speculative business loss for carry-forward. By contrast, the VDA regime is harsher: the official Memorandum states that no set-off of VDA loss is allowed, and such loss cannot be carried forward.
A third practical difference is section 194S. Since section 194S is linked to payment for transfer of VDA, its relevance is much stronger where the transaction is an actual transfer of the crypto asset. Where the transaction is merely a cash-settled contract without transfer of the underlying crypto, the logic of section 194S becomes much weaker.
Downside of speculative business
Speculative business is not automatically superior. The major downside is the ring-fencing of losses. Under section 73, speculation loss cannot be set off against normal business income, salary, capital gains or other heads. It can be set off only against speculation profits, and the loss treatment remains restrictive. Therefore, while speculative business may be better than section 115BBH from the perspective of expense deductibility, it is still limited in relation to loss utilisation.
How spot or delivery-based crypto can be shown in the return
Where the assessee is engaged in actual purchase and sale of the crypto asset itself, the income remains income from transfer of VDA. If the activity is systematic, organised and business-like, the assessee may need to file ITR-3 and disclose the activity under the business head. However, that does not remove the special VDA regime. The ITR validation rules recognise that section 115BBH business income must still align with Schedule VDA. Thus, spot crypto may sit under the business head for return purposes, but the computation still remains governed by section 115BBH, not by ordinary business or speculative rules.
Accordingly, where there is actual transfer of the cryptocurrency itself and the activity is carried on as a business, the assessee would ordinarily use ITR-3, maintain books if otherwise required, fill Schedule VDA, and ensure that the relevant section 115BBH amount is correctly reflected through the business schedules.
How crypto transactions can fall in speculative business
Crypto transactions can more appropriately fall into speculative business only where there is no transfer of the VDA itself, but instead a contract settled otherwise than by actual delivery or transfer. This is the core principle flowing from section 43(5).
Accordingly, the strongest candidates for speculative-business treatment are:
- cash-settled crypto futures or options;
- non-delivery crypto price-difference contracts;
- similar crypto-linked contracts where the assessee is not receiving or giving the underlying coin itself.
If the activity genuinely falls in speculative business, it would be disclosed in the speculative-business portion of Schedule BP, which separately captures net profit or loss from speculative business. This is distinct from the Schedule VDA reporting flow.
Position regarding tokenised derivative instruments
There is a grey area where the derivative instrument itself is a separately tradable token, code or digital instrument which may independently satisfy the broad definition of VDA in section 2(47A). If such instrument is itself a transferable digital representation of value and is independently traded as an asset, a VDA argument becomes stronger. However, in the case of ordinary platform-based futures or options that are merely contractual claims settled in money, the better present view remains that section 115BBH should not automatically apply merely because the reference asset is crypto.
Real legal test
The real dividing line is not "which head is more beneficial" and not "which head the assessee prefers." The real legal test is:
Is there a transfer of the VDA itself?
If yes, the matter ordinarily moves toward section 115BBH and the VDA regime.
Is there only a non-delivery contract or cash-settled derivative exposure?
If yes, the matter ordinarily moves toward the business / speculative business framework, subject to section 43(5) and section 73.
That is the central principle that should guide classification.
Final conclusion
The better legal position may be summarised as follows.
Where the assessee is trading in spot or delivery-based cryptocurrency, the income is ordinarily income from transfer of VDA, and section 115BBH applies at the special 30% rate, with only cost of acquisition being deductible and with the restrictive VDA loss rules.
Where the assessee is dealing in cash-settled crypto futures or options, and there is no actual transfer of the underlying cryptocurrency, the stronger statutory view is that such income is generally not taxable under section 115BBH merely because the underlying reference is crypto. Instead, it is more appropriately examined under the business-income framework, and because of section 43(5), it will often tend toward speculative business, unless a recognised-exchange derivative carve-out is truly available.
Speculative business is not automatically taxable at 30%. For an individual, it is generally taxed at the normal slab / regime rates. For a firm / LLP, it may effectively bear 30% because the entity's normal rate is 30%. For a company, the applicable rate depends on the relevant company regime. By contrast, VDA transfer income under section 115BBH is subject to a flat 30% special rate.
Finally, because I did not locate any direct CBDT clarification specifically settling the treatment of crypto futures and options, the above should be treated as a reasoned statutory position based on sections 115BBH, 194S, 43(5), section 73, and the ITR architecture, rather than as a point already conclusively settled by an express departmental circular.
The author can also be reached at varunmukeshgupta96@gmail.com
CAclubindia
