Taxation of Cryptocurrency Trading in India: Current Law and Post-Budget 2026 Position

Introduction

In this article, we discuss the income-tax implications of cryptocurrency transactions from the perspective of the assessee. If any person is trading or investing in cryptocurrency, this article is intended to serve as a practical and comprehensive guide explaining the key tax and compliance aspects, including how such transactions are to be reported, what particulars are required to be disclosed, whether tax is deductible at source (TDS), how the applicable tax is to be computed, and the limited lawful methods available to manage tax exposure under the present legal framework.

A particularly important development is the amendment proposed in Budget 2026 relating to the reporting framework for crypto-assets. Although this amendment is not directly worded as a filing obligation on every individual trader, its practical effect is likely to be felt by the assessee as well, because the Government is moving toward a more detailed and structured information-reporting regime in relation to cryptocurrency transactions. Consequently, persons dealing in cryptocurrency should now be more cautious, more transparent, and more proactive in ensuring that the data reported in their return of income is properly reconciled with the information available or likely to become available with the Income-tax Department.

Accordingly, this article first explains the Budget 2026 amendment - what exactly has been proposed, what change has been made by the Government, and how that change may indirectly affect a person trading in cryptocurrency. Thereafter, the article proceeds to discuss the broader framework of cryptocurrency taxation in India, including the applicable rate of tax, allowability or non-allowability of expenses, TDS implications, disclosure requirements in the Income-tax Return, and the precautions that an assessee should keep in mind while reporting such transactions.

It is hoped that, after reading this article, the assessee will obtain a clear understanding of the legal and practical issues surrounding cryptocurrency taxation and reporting. In case any doubt still remains regarding cryptocurrency reporting, taxability, reconciliation, or any related issue, you may contact us at the details mentioned at the end of this article.

Budget 2026 amendment: stronger crypto reporting framework - Why the assessee should now be more careful

The assessee should keep in mind that Budget 2026 has proposed a separate penalty framework for crypto-asset reporting. Under the proposed substitution of section 446 of the Income-tax Act, 2025, if a person who is required to furnish a statement in respect of a crypto-asset transaction under section 509(1) fails to furnish such statement, a penalty of Rs 200 per day may be imposed for the continuing default. Further, if inaccurate information is furnished and such inaccuracy is not corrected, or if the due-diligence requirement is not complied with, a penalty of Rs 50,000 may be imposed. The Budget Speech expressly states that this proposal is intended "to ensure compliance" with section 509 and to create a deterrence against non-furnishing and inaccurate furnishing of crypto-asset information. These amendments are proposed to take effect from 1 April 2026.

At the same time, it is important to state the legal position correctly: the reporting obligation under section 509 is not, on its face, drafted as a direct statement-filing requirement for every ordinary retail trader. It is placed on the "prescribed reporting entity" in respect of crypto-assets. However, the practical implication for the assessee is significant. Once the law imposes specific penalties for non-reporting and inaccurate reporting by such entities, the compliance pressure on exchanges, platforms, intermediaries and other notified reporting persons becomes much stronger. As a result, the Department is likely to receive a more robust and more structured flow of third-party crypto transaction information. That is a practical inference from the statutory design and the Budget explanation.

Therefore, any assessee who has traded in cryptocurrency should now act more proactively while filing the return of income. The assessee should carefully reconcile the following before filing the ITR:

(1) exchange-wise trade history,
(2) wallet and transfer records,
(3) section 194S TDS reflected in Form 26AS,
(4) figures reported in Schedule VDA and
(5) other portal-populated information wherever available. This is especially important because the Department's own defective-return guidance already states that the sale consideration shown in Schedule VDA should not be less than the gross receipts reflected against TDS under section 194S in Form 26AS; otherwise, consequences under section 139(9) may arise.

Accordingly, the compliance message for the assessee is clear: even though the statutory reporting burden under section 509 is targeted at prescribed reporting entities, the risk of mismatch for the trader/investor increases because the reporting ecosystem around crypto is becoming tighter. A person who has traded in crypto should therefore not assume that non-disclosure or partial disclosure will go unnoticed. The safer course is to make full and correct disclosure of VDA transactions in the return, reconcile the figures with available tax-portal data, and correct any mismatch in time. This is not merely a theoretical concern; it is the direct compliance effect of the Government strengthening the crypto information-reporting chain.

Now we discuss about the Crypto taxability

1) The starting point: what the law taxes

India taxes crypto under the VDA regime introduced by Finance Act, 2022. The law taxes income from transfer of a virtual digital asset under section 115BBH at a special rate of 30%, and it separately requires 1% TDS on transfer consideration under section 194S. The official Budget Memorandum also records that VDA was defined in section 2(47A) and that certain items such as gift cards/vouchers, reward/loyalty points, and website/platform subscriptions were later excluded from the VDA definition by notification.

In plain language, if you buy and sell Bitcoin, Ether, Solana, meme coins, exchange tokens, or many similar crypto-assets, the special VDA tax regime is the first place to look. The law is aimed at transfer of the asset, so it clearly covers sale for rupees and also expressly contemplates cases where consideration is in kind or where one VDA is exchanged for another VDA.

2) What is the tax rate?

For a trader or investor, the core rate is 30% on income from transfer of VDA, plus applicable surcharge and 4% health and education cess. The Income-tax portal FAQ also states that gains from VDA are taxed at 30% along with applicable surcharge and 4% cess under section 115BBH.

This means VDA does not get the usual concessional capital-gains treatment available to certain listed securities. There is no 12.5% / 20% / 10% style capital-gains regime for VDA under the present statute; instead, the ITR schema separately identifies "Capital gains on transfer of virtual digital asset taxable at the rate of 30%", and the ITR-3 form separately maps section 115BBH at 30% whether shown under capital gains or under business income.

Simple example

If you bought crypto for Rs 5,00,000 and later sold it for Rs 6,20,000, your basic VDA income is Rs 1,20,000. Tax on that VDA income is 30% = Rs 36,000, and then applicable surcharge, if any, and 4% cess are added.

3) What expenses are allowed?

The law is extremely restrictive. The official Budget Memorandum states that while computing income from transfer of VDA, no deduction in respect of any expenditure or allowance is allowed other than cost of acquisition. It further says that no set-off of any loss is allowed in the computation, and VDA loss cannot be carried forward.

So, the clearly allowed item is:

• Cost of acquisition - in ordinary purchase cases, this means the purchase cost of the particular crypto asset transferred.

Example

• Bought ETH for Rs 2,00,000, sold for Rs 2,70,000.
• Taxable VDA income = Rs 70,000.

4) What expenses are disallowed?

Because the statute allows only cost of acquisition, the following are, as a conservative reading, not deductible against VDA transfer income:

• brokerage / exchange selling fee,
• internet bills,
• salary paid to dealers,
• advisory fees,
• office rent,
• electricity,
• depreciation on computers,
• data subscriptions,
• interest on borrowed money,
• wallet charges / software expenses,
• mining infrastructure expenses,
• any other business-style overheads or allowances.

This follows from the statutory words "no deduction in respect of any expenditure … or allowance" except cost of acquisition.

One nuance: the official material I traced does not separately clarify whether every incidental acquisition charge can automatically be capitalised into "cost of acquisition." The safest approach is to treat the actual asset purchase cost as clearly allowable and take a transaction-specific view on any add-on acquisition charges only with proper documentation. That caution arises because the statute expressly permits only cost of acquisition and is otherwise prohibitory.

5) Can loss from one coin be set off against gain from another coin?

The law is drafted harshly, and the compliance architecture also reflects that harsh reading. The Memorandum says no set-off of any loss is allowed while computing VDA transfer income, and VDA loss cannot be set off against income under any other provision or carried forward. In addition, the current validation rules for Schedule VDA total only positive incomes for business-income rows and for capital-gain rows.

Accordingly, the safer practical position is:

• Do not assume that loss on Coin A can reduce gain on Coin B.
• At the very minimum, the Act clearly bars set-off against non-VDA income and bars carry-forward.
• The portal's Schedule VDA design, which aggregates positive incomes, is also aligned with the strict approach.

Example

Gain on BTC: Rs 80,000
Loss on SOL: Rs 50,000

A normal business or capital-gains approach would try to net this to Rs 30,000. Under the VDA regime, that is risky. The safer compliance view is that the Rs 80,000 positive income remains taxable, while the Rs 50,000 loss does not help you reduce other income and cannot be carried forward.

6) Is crypto trading "capital gain" or "business income"?

For individuals, the portal materials show both possibilities in practice. The ITR-2 FAQ says VDA income can be disclosed in Schedule VDA and taxed at 30% under the head capital gain in ITR-2 and ITR-3. At the same time, the ITR-3 form and validation rules expressly contemplate Schedule VDA entries where the head of income is selected as either Business income or Capital Gain.

Therefore, the practical position is:

• Investor-like holding: usually reported as capital gains.
• Organised, frequent, systematic trading business: may need business income treatment.
• But the special 30% rate under section 115BBH applies either way to transfer income from VDA.

For a normal individual who buys/sells on exchanges but is not running a full-fledged trading business, ITR-2 / capital-gain presentation is commonly the cleaner route. If the activity is truly business-like - with books, turnover, trading infrastructure and business reporting - ITR-3 is usually the safer form.

7) Is there any holding-period benefit?

No special holding-period benefit is available under the VDA regime in the way it exists for many traditional capital assets. The ITR forms segregate VDA into a separate 30% bucket, rather than the usual long-term / short-term concessional capital-gains buckets.

So, whether you hold crypto for 10 days or 10 months, the special section 115BBH rate of 30% remains the core rule for transfer income.

8) What about TDS under section 194S?

This is the second major compliance layer. The official Finance Act 2022 Memorandum states that section 194S requires 1% TDS on consideration for transfer of VDA to a resident. It also expressly covers cases where consideration is wholly in kind, or partly in cash and partly in kind but the cash portion is not enough to meet the TDS liability. In those situations, tax must be ensured before release/payment.

The same Memorandum states the threshold:

• Rs 50,000 in a financial year if the payer is a specified person;
• Rs 10,000 in any other case.

A specified person includes:

• an individual or HUF whose turnover in the immediately preceding year does not exceed Rs 1 crore in business or Rs 50 lakh in profession; or
• an individual or HUF having no income under "Profits and gains of business or profession."

Example

You sell crypto for Rs 10,00,000 through a covered transaction.
TDS under section 194S = 1% of consideration = Rs 10,000.

This is not final tax. It is only tax credit. If your actual VDA gain is Rs 2,00,000, your basic VDA tax is Rs 60,000 plus cess/surcharge as applicable; the Rs 10,000 TDS is then claimed as credit in the return.

9) Does TDS under 194S end the matter?

No. TDS is only a tracking and collection mechanism. The return still has to correctly disclose the sale consideration, cost, dates and income. The portal's defective-return FAQ says the assessee must ensure that the sale consideration in Schedule VDA is not less than the gross receipts reflected against section 194S in Form 26AS, otherwise section 139(9) defective-return consequences may arise.

So, even if TDS has been cut by the exchange or buyer, you must still:

• compute actual VDA income,
• report it in Schedule VDA,
• claim the TDS credit,
• pay any balance tax through advance tax / self-assessment tax.

10) How is 194S reported and paid?

Where the simplified PAN-based deduction route applies, the portal provides Form 26QE for TDS on Transfer of Virtual Digital Asset. The portal's e-Pay manual says that in 26QE the deductor PAN is prefilled and the filer enters the deductee PAN, address, mobile number, email, date of transfer and total consideration value. The e-Pay FAQ also states that TAN is not required for Forms 26QB / 26QC / 26QD / 26QE, because these are PAN-based challan-cum-statements.

The same FAQ further states that Forms 26QB/26QC/26QD/26QE are only for resident deductees; if the deductee/seller is non-resident, the applicable form is Form 27Q.

For exchange-level alternatives contemplated in the rules, Notification No. 73/2022 inserted Form 26QF, a quarterly statement to be furnished by an exchange in certain section 194S scenarios.

11) If I trade through an exchange, who deducts the 1%?

In many exchange-facilitated resident transactions, the exchange or broker ecosystem may handle the deduction/reporting mechanics as per section 194S arrangements and the related rules. Notification No. 73/2022 specifically contemplates cases where an exchange agrees to pay tax and then furnishes Form 26QF quarterly.

But do not assume that every platform has complied correctly in every case. The safer compliance approach is to reconcile:

• exchange contract notes / trade history,
• Form 26AS,
• Schedule VDA,
• and, where relevant, your own TDS responsibility.

12) In which ITR should it be reported?

For individuals:

• ITR-2 is the usual form where there is no business income and the VDA position is being shown under capital gains.
• ITR-3 is the practical form where the assessee has business income or is treating crypto activity as part of business/profession.
• The portal FAQ confirms Schedule VDA in ITR-2 & ITR-3, and the validation rules show Schedule VDA can flow to capital gain or business income depending on the selected head.

For firms / companies / others, the validation rules also show VDA mapping in those returns, but for your immediate question - an individual trading in crypto - the practical choice is usually ITR-2 vs ITR-3 depending on whether there is business income.

13) What details have to be reported in Schedule VDA?

The portal material indicates that the assessee has to disclose VDA transaction details such as sale consideration, purchase consideration, date details, etc. The Schedule VDA validations also require that the income column is computed as sale consideration minus cost, and they total positive incomes under the chosen head.

From a record-keeping perspective, you should maintain:

• date of purchase,
• date of sale/transfer,
• asset name / token,
• quantity,
• purchase value,
• sale value,
• INR conversion basis if the trade occurred in crypto pair,
• exchange statement,
• wallet / transaction hash where applicable,
• and TDS proof / Form 26AS reconciliation.

14) When should tax be paid?

There are two separate cash-flow points:

(A) During the year - Advance tax

If your net tax liability is more than Rs 10,000 for the year, advance tax is generally payable in instalments. The department's advance-tax page gives the standard schedule:

• by 15 June: at least 15%
• by 15 September: at least 45%
• by 15 December: at least 75%
• by 15 March: 100% of advance tax.

(B) At return filing - Self-assessment tax

If after reducing TDS/TCS/advance tax there is still tax payable, that balance is paid as self-assessment tax through the portal's e-Pay Tax flow before filing the return. The portal user manual shows the Income Tax (Advance Tax, Self-Assessment Tax, etc.) payment tile for PAN holders

Important practical point

Many crypto traders think, "1% TDS कट गया, so tax is done." That is wrong. The final VDA tax is 30% of income, while TDS is only 1% of gross consideration. In a profitable trade, balance tax will usually still remain payable.

15) What happens if advance tax is not paid on time?

The portal FAQ and ITR instructions state that failure to pay advance tax can attract interest under sections 234B and 234C. Delay in filing the return can also attract section 234A interest and late-filing fee consequences under the return law.

So, one lawful and very practical way to "save tax cost" is not by claiming barred deductions, but by avoiding avoidable interest and fees through timely advance tax and timely filing.

16) Can presumptive taxation under section 44AD / 44ADA be used for crypto trading?

You should be very cautious here. The ITR schema separately maps section 115BBH business income into the special-rate framework, and the statute itself says no deduction other than cost of acquisition is allowed while computing VDA transfer income. That structure does not sit comfortably with using a presumptive regime to collapse VDA trading into ordinary presumptive percentages.

My professional view is that a crypto trader should not casually assume that section 44AD/44ADA can be used to dilute the 30% VDA regime. The safer reading is that section 115BBH overrides the ordinary expense model for VDA transfer income, even if the activity is shown under the head "business." This is an inference from the statutory design and return architecture, and I have not traced an official CBDT clarification specifically approving presumptive taxation for VDA-transfer profits.

17) What about tax audit if crypto trading is treated as business?

If your crypto activity is being treated as a business and the applicable turnover/gross-receipt thresholds are crossed, tax-audit exposure has to be separately examined. The current portal validation rules reflect the usual section 44AB audit thresholds, including business thresholds that can go up to Rs 10 crore in low-cash cases, and presumptive-related thresholds for 44AD/44ADA.

So if an assessee is running substantial, organised crypto trading as a business - rather than merely investing - then tax-audit and books-of-account questions may arise independently of the 30% VDA tax rate.

18) What about gifts of crypto?

Finance Act 2022 also amended the law so that VDA is included as "property" for the purposes of section 56(2)(x). Therefore, receipt of VDA by way of gift can trigger taxation under the gift provisions where the general section 56 conditions are met.

This matters even for traders because some people try to move coins between persons and assume there is no tax issue. That assumption can be dangerous. Gift taxation and later transfer taxation are separate questions.

19) Lawful ways to reduce or control the tax burden

Under the current law, lawful tax-saving options specific to VDA are very limited because the statute deliberately blocks most deductions and loss relief. The realistic ways to reduce or control tax cost are these:

First, maintain exact purchase records so that the correct cost of acquisition is claimed on every transfer. Since this is the only clearly allowed deduction, poor records directly increase taxable income.

Second, reconcile and claim all section 194S TDS credits in the return. Many assessees lose credit because Schedule VDA / 26AS figures are not reconciled properly. The portal expressly warns that sale consideration in Schedule VDA should not be lower than 194S gross receipts in 26AS.

Third, pay timely advance tax where liability exceeds Rs 10,000 so that sections 234B / 234C do not add cost

Fourth, use the correct ITR form and correct head of income. A wrong form, wrong head, or incomplete Schedule VDA can create defective-return problems and later dispute.

Fifth, do not build your tax planning around assumptions that are contrary to the statute - such as set-off of VDA losses, deduction of normal trading expenses, or using presumptive provisions to sidestep section 115BBH. The law is drafted against that approach.

20) What you should not do

A crypto trader should not proceed on these assumptions:

• "I can deduct all my exchange fees and internet bills." - No, not clearly permitted; only cost of acquisition is expressly allowed.
• "My loss on one token can offset profit on another." - Unsafe under the current VDA regime and portal design.
• "1% TDS means tax is fully paid." - No, final tax is still computed at 30% of income.
• "If I show it as business income, the 30% rule disappears." - No, the ITR schema still maps 115BBH business income at 30%.

21) A practical compliance checklist for a crypto trader

For each financial year, a prudent assessee should do the following:

1. Download exchange-wise trade history and wallet history.

2. Prepare coin-wise and transaction-wise statement showing purchase value, sale value and gain.

3. Identify all transfers for INR, crypto-to-crypto swaps and other disposal events.

4. Reconcile section 194S TDS with Form 26AS.

5. Classify the activity as capital gains or business income based on facts, consistently.

6. Fill Schedule VDA transaction-wise.

7. Pay advance tax if required and later any self-assessment tax balance.

8. Keep documentary evidence ready for cost of acquisition and reconciliation.

22) Final conclusion

For an assessee trading in cryptocurrency in India today, the law is deliberately strict:

• 30% tax on income from transfer of VDA, plus surcharge and cess;
• only cost of acquisition is clearly deductible;
• no normal expense deduction;
• no meaningful loss relief in the ordinary sense;
• 1% TDS on transfer consideration under section 194S;
• reporting through Schedule VDA, with 26AS reconciliation;
• and timely advance tax / self-assessment tax is essential to avoid interest.

The biggest practical message is this: under current law, crypto taxation is not a normal business-expense model. It is a special-rate, low-deduction, high-compliance regime. The lawful way to protect the assessee is therefore not aggressive expense claims, but accurate cost records, correct head of income, full TDS credit, and timely tax payment.

The author can also be reached at varunmukeshgupta96@gmail.com