Tax season is upon us, and with that, every investor is scrambling to file their Income Tax Returns (ITR) correctly. For crypto investors, this is a particularly tricky task because there is very little room for error. With the July 31 deadline looming, crypto investors must carefully review their tax records and avoid common mistakes such as failing to report, incorrectly calculating their gains, or using the wrong ITR schedule.
The Current State Of Crypto In India
Crypto in India has existed in a somewhat of a regulatory dead zone since 2018 after an Indian court struck down Reserve Bank of India (RBI) directives that effectively shadowbanned cryptocurrencies. The directives were issued in a circular titled Prohibition on Dealing with Virtual Currencies and instructed financial institutions to stop providing services to businesses engaging with cryptocurrencies.
The directive rendered fiat-to-crypto rails inoperable, and crypto exchanges were forced to scale back operations and rely on alternate avenues after banks severed their relationships with crypto-related businesses and exchanges. Despite the court ruling striking down the directives, the unofficial ban remained in place, with the RBI repeatedly issuing verbal warnings directing lenders to withhold services to the industry. The warnings led several major banks to sever relationships with crypto exchanges, and were one of the reasons Coinbase discontinued services and halted onboarding new users. The exchange has since restarted its operations in India.
The RBI recently reiterated its support for policies favoring banning crypto in India, and wants banks and financial institutions in the country barred from exposure to crypto and private stablecoins to limit risks to the country’s financial system. The Income Tax Department has also reported concerns around the misreporting of crypto assets in tax filings, further muddying the already muddled crypto industry in India.
India’s Tax Framework For Crypto
India has one of the strictest tax regimes for crypto. The Union Budget for 2026 retains the Virtual Digital Asset tax structure introduced in 2022, but tightens reporting obligations and introduces new penalties for non-compliance. The new provisions and penalties came into effect on April 1, 2026. Under the new framework, failure to furnish crypto transaction statements attracts a penalty of Rs. 200 per day. Inaccurate information about crypto transactions, or failing to correct such information, attracts a flat penalty of Rs. 50,000.
Now, let’s get into the crux of this article. India has established one of the most definitive tax regimes for crypto, and investors must stay updated on evolving income tax compliance rules. India taxes crypto assets under Section 115BBH of the Indian tax code, a section that has no provisions for reduced tax rates. The section also limits deductions to the asset’s acquisition cost, and investors cannot claim any other deductions when calculating their taxable income.
India imposes a flat tax rate of 30% on profits earned by selling, swapping, or spending crypto. Crypto transactions are also subject to an additional 4% health and education cess. Additionally, a 1% Tax Deducted at Source (TDS) is levied on all VDA transfers to ensure tax compliance. TDS is applicable on individual and institutional crypto transactions.
Let’s understand how this works. Assume a trader makes a profit of Rs. 1,00,000 on Bitcoin (BTC), but reports a loss of Rs. 50,000 on Ethereum (ETH). Indian tax law mandates the trader pay tax on the Rs. 1,00,000 and not on the Rs. 50,000. This is because traders cannot offset the Rs. 50,000 loss, a rule that catches most traders unaware. Traders can only deduct the asset’s acquisition cost. Deductions like brokerage, internet costs, and platform fees cannot be claimed.
Next, let’s discuss TDS. TDS is a tax collection mechanism where a percentage of tax is deducted at the point of income and remitted to the government. TDS helps the government track crypto trading and transactions, and is considered an advance tax. TDS deducted is reflected in Form 26AS and the Annual Information Statement (AIS). Traders can claim a refund if their tax liability is lower than their TDS. However, if their tax liability is higher, they must pay the difference.
Under the revised Income Tax Regulations for Crypto in India, crypto asset sales are subject to a 1% TDS. The rule came into effect on July 1, 2022, and applies to both individual and institutional transactions of crypto assets. It is important to note that TDS applies to crypto transactions above a specified threshold (Rs. 50,000 and Rs. 10,000 in specific cases). TDS is deducted automatically on Indian transactions. However, the responsibility of deducting and depositing TDS falls on the buyer in P2P transactions.
Additionally, a 4% Health and Education Cess is applied on the 30% flat tax on crypto, bringing the effective tax rate to 31.2%. Here’s an example to help you understand how the cess is applied. Let’s assume a trader makes a profit of Rs. 100, which attracts a flat 30% tax, making the base tax Rs. 30. A 4% cess on the Rs. 30 tax is Rs. 1.20, bringing the effective tax to Rs. 31.20.
Tax On Crypto Mining, Gifts, Airdrops, And Staking
This is an oft-ignored area when it comes to crypto tax. It is also likely to trigger the most notices to unsuspecting traders. Let’s look at the tax liability for each.
Staking or mining income is considered income at the fair market value on the date of receipt. This income is taxed according to the applicable income tax slab, not at the flat 30% rate. However, if the trader sells their staked tokens, the profit over the value at which they were originally taxed is taxed at 30%. Airdrops are also considered income at the fair market value on the date of receipt, and are taxed accordingly.
However, crypto received as a gift is taxed slightly differently. If the value exceeds Rs. 50,000, it is taxed as income from other sources. However, crypto received as a gift from relatives (spouse, siblings, parents) is exempt. When the gifted crypto is sold, the original buyer’s acquisition cost is considered the cost basis.
Cost Basis Method
The taxation rules have been relatively straightforward so far. Now, we’re getting into slightly complicated territory. What happens when a trader has purchased a cryptocurrency at different prices over time, and wishes to sell? In such a scenario, what would be the trader’s purchase price?
India uses the FIFO (First-In First-Out) method for crypto transactions. This method assumes that the oldest items, or in this case, cryptocurrency, are sold first and is used to determine the cost basis. The FIFO method is the default accounting method in several countries, including India. Let’s understand how this method works.
Suppose a trader purchases a coin for Rs. 1,000 in January. The trader then purchases another coin for Rs. 2,000 in February before selling one coin for Rs. 4,000. Under the FIFO method, the coin purchased in January was the first-in and will be treated as the first-out. This means the trader’s cost basis is Rs. 1,000 and results in a taxable gain of Rs. 3,000 (4,000 – 1,000 = 3,000).
Reporting Crypto Transactions
Crypto transactions in India are reported under Schedule VDA, introduced specifically for digital assets. Traders must report the following:
- Date of acquisition of assets
- Date of transfer of assets
- Cost of acquisition
- Sale consideration
- Profit and loss, noting that losses cannot be set off
Salaried individuals with crypto gains must file ITR-2, while businesses with crypto income and entities with crypto as their business income must file ITR-3.
Non Compliance
India has implemented stricter penalties for failure to report their crypto income accurately. The Union Budget 2026 introduced daily fines for cryptocurrency exchanges and other reporting entities if they failed to submit transaction data. It also implemented additional penalties on incomplete or inaccurate disclosures.
Individual taxpayers who don’t report their crypto gains will be scrutinized under Section 148 and be liable for penalties up to 200% of the tax evaded if it is found that they deliberately concealed their gains. Exchanges operating in India must also register with the Financial Intelligence Unit (FIU), putting crypto firmly in the eye of the tax authorities.
In Closing
India’s Union Budget 2026 reinforces the need for reporting crypto transactions to the relevant authorities, heavily penalizing inaccurate reporting and non-compliance.
Despite the uncertainty around crypto in India, it has implemented one of the most comprehensive tax frameworks governing the industry. Investors must be aware of reporting requirements, tax rates, and potential penalties. India’s tax framework is constantly changing as the government engages with stakeholders to draft a comprehensive regulatory framework for the industry. Keeping up with the evolving tax and regulatory landscape is crucial when making crypto transactions in India. Complete your ITR filing before the July 31 deadline to avoid any unnecessary delay.
Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice. Please consult a qualified tax professional or chartered accountant before making filing decisions.
