1. STATUTORY DEFINITION - WHAT IS A DIGITAL ASSET?

Section 2(47A) Income Tax Act, 1961 - inserted by Finance Act 2022, effective 01.04.2022:

Virtual Digital Asset (VDA) means:
(a) any information or code or number or token (not being Indian currency or foreign currency) generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration, with promise or representation of having inherent value, or functions as store of value or unit of account including its use in any financial transaction or investment, but not limited to investment scheme and can be transferred, stored or traded electronically;
(b) a non-fungible token or any other token of similar nature;
(c) any other digital asset as Central Govt may notify.

CBDT Notification S.O. 2956(E) dated 30.06.2022: Excludes from VDA:

• Gift cards/vouchers
• Reward/loyalty points
• Website/platform subscriptions

Includes: Bitcoin, Ethereum, all crypto, NFTs, DeFi tokens, wrapped tokens.

2. TAX FRAMEWORK - FINANCE ACT 2022

A. Income Tax - Section 115BBH [AY 2023-24 onwards]

1. Rate: Flat 30% + 4% health & education cess + applicable surcharge - irrespective of holding period. No slab benefit.
2. Deductions: ONLY cost of acquisition allowed. No deduction for mining cost, transaction fees, electricity, interest.
3. Loss: No set-off. Loss from one VDA cannot be set off against gain from another VDA. Cannot be set off against any other income. Cannot be carried forward. Each transaction is siloed.
4. Gift: If VDA gifted, receiver taxable under Sec 56(2)(x) as income from other sources.

Example: Mr. Sai earns Rs 1,00,000 profit from crypto. Tax = 30% = Rs 30,000 + cess = Rs 31,200, irrespective of his slab.

B. TDS - Section 194S [from 01.07.2022]

• 1% TDS on transfer consideration (not profit) to be deducted by buyer/exchange.
• Threshold: Rs 10,000 per year (Rs 50,000 for specified persons)
• Applies even if transaction at loss.
• No threshold for non-resident.

C. Income Tax Act, 2025 - Continuity: Under new Income Tax Act 2025 (effective 01.04.2026), VDA regime retained under Section 115BBH equivalent - Section 197 (proposed) - same 30% rate retained. Budget Memorandum 2026 confirms continuity.

D. GST:

Currently ambiguous. CBIC has not issued final circular. Two views:

• 18% GST on exchange commission - treated as service - already applied.
• Crypto as goods? If considered actionable claim under Schedule III of CGST Act, no GST on transfer. Karnataka AAR in case of M/s Bangalore Crypto Exchange held crypto is goods liable to GST - under challenge.
• NFTs - 12% or 18% debated.

E. PMLA: Since March 2023, VDA service providers brought under Prevention of Money Laundering Act - FIU-IND registration mandatory.

3. LANDMARK CASE LAWS

CASE 1: Internet and Mobile Association of India (IAMAI) vs Reserve Bank of India - (2020) 10 SCC 274 - Supreme Court - 4 March 2020 - The Foundation Stone

Facts: RBI Circular dated 06.04.2018 directed all RBI regulated banks to not provide banking services to crypto exchanges. Exchanges challenged under Art 19(1)(g).

Judgment: Bench of Justice R.F. Nariman, Aniruddha Bose, V. Ramasubramanian struck down RBI circular.

"RBI failed to show how crypto exchanges caused loss to banks. The ban was disproportionate. Crypto trading is a legitimate business under Art 19(1)(g)."

Taxation Relevance: Court held crypto is capable of being property, economic activity, therefore taxable. Taxation does not mean legalization. This judgment reopened banking channels and is cited by ITAT for taxability.

CASE 2: ITAT Rulings on Loss Set-off - Harsh Regime Tested

Mr. XYZ vs ITO, Jodhpur ITAT - 2024 (reported in Livemint): Investor faced addition of Rs 88.55 lakh tax despite actual loss of Rs 3.34 lakh. He traded Bitcoin - profit in one trade, loss in another. AO applied Sec 115BBH literally - profit taxed 30%, loss ignored. ITAT confirmed AO action - held Sec 115BBH is special provision overriding Sec 70 set-off. No relief. This case shows harshness.

Ajeesh vs ITO, Cochin ITAT 2023: Mining income - Tribunal held mining cost is not cost of acquisition. Only cost is zero for self-mined crypto until transfer. On transfer, entire consideration taxed at 30%.

CASE 3: Madras High Court - WazirX User Dispute - 2023 - Crypto as Property

In a dispute between WazirX and user, Madras High Court observed crypto assets are property under law of property, capable of being inherited, attached, and taxed. Reinforced asset framing for Income Tax Act.

CASE 4: US - IRS vs Coinbase - Global Parallel

• US: IRS Notice 2014-21 - Crypto as property, taxed as capital gains (0-20% long term) + ordinary income for mining. Case Jarrett vs US (2021) - staking rewards taxable.
• UK: HMRC Crypto Manual 2021 - Crypto as property, Capital Gains Tax (10-20%) if investment, Income Tax if trading. Case R v. Hancox upheld.

4. CRITICAL ANALYSIS - ONGOING LITIGATION

1. Challenge under Article 14 - Constitutionality of 30% flat rate

Writ petitions pending in Delhi HC and Bombay HC - Blockchain and Crypto Assets Council (BACC) vs UoI - argue:

• No deduction for cost of infrastructure violates equality
• No loss set-off violates ability-to-pay principle
• Taxing gifted VDAs in hands of receiver without consideration.

CBDT defence: Sec 115BBH is special rate like lottery winnings Sec 115BB (30%). Govt intentionally wants to discourage crypto while taxing it.

2. TDS Challenge: Exchanges argue 1% TDS on gross consideration drains liquidity and causes capital lock.

Summary for Compliance:

Planning Tip as per 2025-26 law: Since loss cannot be set off, avoid frequent trades. Hold loss assets, do not sell in same year as profit assets if possible, because loss will be wasted.