1. Definition

Finance Act 2022 - Sec 2(47A) Income Tax Act:

Virtual Digital Asset [VDA] means:

• Any information or code or number or token generated through cryptographic means or otherwise
• Includes crypto, NFT, and other token notified
• Excludes: gift cards/vouchers, reward points, website subscription, CBDC - Digital Rupee.

For banks, CBDC is currency, Crypto is property/asset - confirmed by Madras High Court 2025.

2. Taxation Compliance - Two Taxes

A. Sec 115BBH - Flat 30% + 4% cess + surcharge on GAINS

• From AY 2023-24
• Rate: 30% on profit = Sale price - Cost of acquisition only. No deduction for mining cost, platform fee, internet, etc.
• No set-off of loss: VDA loss cannot be set off against any other income, nor VDA profit against other loss. Loss cannot be carried forward.
• No 87A rebate, no basic exemption benefit.
• Gift tax: If you receive VDA as gift > Rs 50,000, taxable in recipient's hands as income from other sources.

B. Sec 194S - 1% TDS - Where Banking hits

Effective 1 July 2022. This is the collection mechanism banks / exchanges must enforce.

• Who deducts? Any person responsible for paying to any resident any sum by way of consideration for transfer of VDA shall deduct at time of credit or payment whichever earlier.
• Rate: 1% of consideration. If PAN not available - 20%.
• Threshold: Rs 10,000 per year for others, Rs 50,000 per year for specified person - individual/HUF not having business >1cr/ profession >50L.
• In P2P transaction - buyer deducts directly. CBDT Circular 13/2022.
• If through exchange - Exchange must deduct. If both buyer and seller through exchange and consideration in kind, CBDT clarified via Circular 14/2022: Exchange deducts even if consideration other than cash. TDS on consideration less GST.
• If both Sec 194O [e-commerce] and 194S applicable - 194S prevails.

Bank's role: Bank that processes fiat settlement for exchange must ensure exchange has deducted TDS, has valid TAN, and files quarterly Form 26Q. Many banks now ask for TDS challan before allowing large INR withdrawal from crypto exchange.

3. Banking & PMLA Compliance

Banks are not just payment processors. Since March 2023 Gazette, VDA Service Providers are Reporting Entities under PMLA, 2002.

Framework:

1. FIU-IND Registration: All exchanges like WazirX, CoinDCX, CoinSwitch must register with Financial Intelligence Unit - India. 9 exchanges registered as of 2026. Offshore exchanges blocked if not registered.
2. KYC / AML: Bank must do Enhanced Due Diligence on VDA clients - beneficial owner, source of funds, Travel Rule under FATF - originator/beneficiary info for transactions > Rs 50,000.
3. STR / CTR: Bank + Exchange must file Suspicious Transaction Report if transaction >10L cash, or suspicious pattern, to FIU.
4. Account Freezing Power: ED can direct banks to freeze under PMLA.

4. Case Laws - Indian

1. Internet and Mobile Association of India (IAMAI) v. Reserve Bank of India - Supreme Court - WP(C) 528/2018 - 4 March 2020 - Most Important Banking Case

RBI circular dated 6 April 2018 banned banks from providing services to crypto exchanges.
SC struck down ban as violative of Article 19(1)(g) on ground of proportionality - RBI had not shown any loss to regulated entities, no study, less drastic measures like regulation available. Banking access restored immediately. This is basis why banks today can service exchanges.

2. Madras High Court - 2025 - Crypto as Property

Held cryptocurrency is not currency but property under law, can be attached, inherited, is a store of value. Significant because it distinguishes from speculative transaction and confirms it is capital asset, not currency - so banking laws of currency don't apply, but property and PMLA laws do.

3. WazirX - ED vs Zanmai Labs - 2022 - PMLA Account Freeze

ED alleged WazirX facilitated Rs 2,790 crore illegal transactions via instant loan apps. Bank accounts of WazirX frozen under PMLA for failure to report. Exchange forced to comply with AML laws, implement KYC, register with FIU-IND. Lesson: Banks processing for exchanges must themselves comply with PMLA AML guidelines and prefer registered counterparties.

4. ITAT - Bitcoin investor faces Rs 88.55 lakh tax addition despite Rs 3.34 lakh loss - Livemint 2024 - FY 2017-18 case

Before 115BBH, Department tried to tax notional value as unexplained investment u/s 69. ITAT held Sec 2(14) as it stood then did not explicitly describe crypto as capital asset, but profit still taxable as business income. Loss cannot be ignored. After 115BBH, this is codified - flat 30% irrespective of holding period.

5. Vidhigyata Insight & CBDT Notifications - Legal Grey Area Case

Sections 115BBH and 194S impose flat 30% tax and 1% TDS on VDA transfers, while CBDT notifications carve out limited exclusions. Yet beyond taxation, no comprehensive regulatory law governs crypto trading, stablecoins or DeFi.

Courts have taken note that government is using taxation as implicit regulation - tax first approach upheld.

5. International Reference for Banking Compliance

US - United States v. Coinbase Inc., No. 17-cv-01431 - 2017 - John Doe Summons
IRS forced Coinbase to disclose 14,000+ customers with >$20k transactions. Basis for current US 1099 reporting by banks.

EU - DAC8 - 2026 effective: Banks and Crypto Asset Service Providers must report VDA holdings of EU residents - automatic exchange.

6. Compliance Checklist for Bank in India Handling VDA Clients

For a bank in Ghaziabad handling VDA exchange or HNI crypto client:

1. Onboarding: Is exchange FIU-IND registered? Check FIU list. Obtain FIU registration certificate, PMLA policy, Audit report.
2. Tax: Ensure exchange has TAN, is deducting 194S, filing 26Q. For individual clients - if large crypto proceeds credited, check Form 26AS for 194S credit.
3. Transaction Monitoring: Rule: If INR >10L in a day from crypto, trigger CTR. If round tripping, structuring just below Rs 10,000 to evade TDS - file STR.
4. No Loan / No Margin: RBI has not allowed crypto as collateral. Do not lend against VDA.
5. Reporting in ITR: Under Schedule VDA introduced, client must disclose each transfer. Bank statement is secondary evidence under BSA 61.
6. Travel Rule: For cross-border VDA transfer, collect originator name, wallet address.

Penalty: Failure to deduct 194S = 30% disallowance + interest 1% pm + penalty u/s 271C + prosecution u/s 276B. Failure under PMLA = Rs 50k to Rs 1L per failure, plus ED can prosecute.