Author: Hikmah Wani, Law centre -1, Delhi University

In this world, “nothing is certain except death and taxes,” as Benjamin Franklin famously stated in 1817. Now, almost two centuries later, with Bitcoin and thousands of other crypto-assets entering the market, even Franklin’s maxim has been challenged. It is no surprise and is quite evident that the global financial system has been deeply impacted by the proliferation of these digital assets, presenting both opportunities and other important regulatory challenges.

It is qute evident that the primary difficulty in takin cryptocurrencies stems from their decentralised and pseudonymous nature. In contrast to traditional finance, cryptocurrency transactions are international and usually take place beyond the control of centralized middlemen, which obviously makes tax enforcement more difficult and leads to disparities between states. According to a thorough literature study, it is then no surprise that this climate encourages ongoing regulatory fragmentation and a lack of harmonization, highlighting the need for global collaboration to create cogent tax laws.

The unique high-incidence tax system in India and the regulatory justification for its policy decisions are the main subjects of this article, which explores the tax design and implementation issues raised by cryptocurrencies worldwide.

There is no proper framework for cryptocurrency taxation in the international community and which is why it was important for each country to form and implement an individual set of rules that would regulate their crypto transactions. This difference in rules makes it harder to tax digital assets properly because it encourages people to move their money to countries with easier rules.

A central challenge lies in classifying crypto-assets for the purpose of taxation. Cryptocurrencies often have a dual nature: they act both as an investment asset (property) and, potentially, as a medium of exchange (currency). The tax consequences hinge critically on this classification:

1) Property/Asset Classification: In most locations, such as the United States, Bitcoin and other digital currencies are regarded as property. Therefore, when you trade, sell, or purchase them, you might need to pay capital gains tax. This is a tricky task because you will need to calculate whether you made a profit or a loss on every sale, which can be difficult for small users.

2) Alternative Classifications: Some countries have different rules. For example, Germany does not tax cryptocurrencies if you hold them for more than a year. Japan treats them as goods. The ongoing discussions about whether to treat crypto as property, securities, or currency show the confusion that makes it hard to have a global agreement. 

The tax rules for crypto are decided by each place, not by a worldwide plan, which causes different opinions on how to tax them. The goal of international tax reform is to fix issues of double taxation consistently, often looking at models like the OECD Model Tax Convention and the UN Model Double Tax Convention. However, much of the existing international tax discussion has mostly focused on general financial stability and monetary policy, leaving cryptocurrency taxation not fully explored.

To understand the tax rules for cryptocurrencies, we need a clear system that sorts different types of transactions. Shaun Parsons uses a method to find possible taxable events, which fall into three groups: Origination, Use, and Extinction.

Origination (How You Acquire Crypto)

This category is how new coins or tokens find their way into your possession. Depending on how you acquire crypto, there can be different tax regulations, but generally speaking, you could be liable to pay regular income tax or capital gains tax, depending on what you did.

1. Mining/Block Rewards (Proof-of-Work): Mining is where individuals utilize computers to assist in operating the cryptocurrency network, such as authenticating transactions for Bitcoin. Miners are rewarded with new coins and a portion of fees for assisting. These rewards are considered regular income in most nations, and you must pay income tax on them, the same as any wage.

2. Staking/Block Rewards (Proof-of-Stake): Rather than consuming a lot of computing power, some networks (such as later versions of Ethereum) allow individuals to “stake” their coins in order to assist in running the network. They are rewarded with new coins, which are also considered taxable income, essentially, the government acts as if you made that money.

3. Hard Forks and Airdrops: Occasionally, coins are distributed for free to the owners of another coin. This may be a promotional action (airdrop) or a divergence from the original coin (hard fork, such as Bitcoin becoming Bitcoin Cash). In India, if you receive such free coins, you are taxed on them as “income from other sources” when you receive them. Subsequently, if you sell those coins, you pay 30% tax on any gain.  

Use (When You Spend or Invest Your Crypto)

If you spend or invest your cryptocurrency, you might need to pay capital gains tax, as you would on shares or real estate. 

1. Medium of Exchange: When you buy something using crypto (e.g., a car or pizza), you are essentially “selling” your crypto to pay for the item. You must see if your crypto went up in value since you acquired it, if so, you pay tax on that increase. If not, you might book a loss.

2. Speculation and Investment: When you purchase and subsequently sell crypto as an investment, you must compute whether you have lost or gained money (capital gain or capital loss). Nations (such as India) tax you on gains, but losses can or cannot be claimed against other income, respectively.  

Extinction (When Crypto Is Removed from Circulation)

This means methods by which crypto vanishes from your grasp: either because it gets cashed back in for ordinary money, you lose access (such as forgetting the password to your wallet), or it gets confiscated (fines). When you exchange crypto for cash (fiat currency), any gain is taxed. If you lose access (such as to a lost wallet), the majority of nations and India don’t allow you to qualify this as a loss for tax reasons.

India recently in 2022 formalized a comprehensive, specific, and high-incidence tax regime for virtual digital assets through the Finance Act, 2022, amending the Income Tax Act, 1961 (ITA). 

India’s approach towards cryptocurrency began with deep scepticism and rightly so for its decentralised nature was a concern not only for India, but a concern all across the world. The Reserve Bank of India had initially banned cryptocurrencies entirely in 2018, citing concerns about consumer protection, market integrity, and money laundering. The RBI also issued strict and rigid instructions directing the banks not to deal in virtual currencies. However,  this  policy was challenged, and the Supreme Court of India eventually quashed the RBI’s circular. The Supreme Court recognized that while cryptocurrencies are not beyond the regulator’s purview, the ban on accessing formal banking channels violated the constitutional right to carry out business and thus failing the “test of proportionality”. This decision by the apex court of India was viewed by the market as a legitimization of crypto products resulting in a massive increase in retail investors. The clear result was that by 2021, India had the highest number of crypto owners globally, exceeding 100 million.

In response to this “phenomenal increase in transactions” and India recognizing the need for a specific regime, the Government of India introduced stringent tax provisions from April 1, 2022 in the Union Budget of 2022.The following rules were introduced:

1. Definition and Scope: The ITA now included the definition of Virtual Digital Assets under Section 2(47A), and included cryptocurrencies, non-fungible tokens (NFTs), and other digital assets. The law was designed to also include any future innovation, allowing the Government of India flexibility to include or exclude assets via official notification.

2. Tax Rate and Non-Deductibility: Now the income from the transfer (trading, selling, or swapping) of VDAs was subject to a flat tax rate of 30% (plus 4% applicable surcharge and cess). This rate applied regardless of whether the income was classified as capital gains or business income, and this in itself worked in the Government's favour since outside India the other countries were finding it difficult to give a proper tag to cryptocurrencies.

3. Acquisition Cost Only: The law was extremely restrictive regarding deductions. In order to calculate the profits now, only the cost of acquisition was allowed as a deduction. No other expenses, such as trading fees or infrastructure costs (like electricity and infra costs incurred in mining), were permitted as deductions.

4. Denial of Loss Offset: Both an important and punitive feature was the denial of loss offset. Loss from the transfer of one VDA could not be set off against income from the transfer of another VDA, nor against any other type of income. That implies that any loss is a “sunk cost”. 

5. Taxation of Specific Activities:

Mining: Income that miners received at the time of mining was taxed at slab rates based on the fair market value of the tokens received. The cost of acquisition for the mined crypto is considered zero for computing gains at the time of subsequent sale.

Airdrops and Gifts: Airdrops and crypto assets received as gifts are taxed as ‘Income From Other Sources’ at normal slab rates upon receipt, based on fair market value. If later sold, the initial value taxed upon receipt can be claimed as the cost of acquisition, and the resulting gain is taxed at 30%. Gifts received from relatives or certain special occasions (marriage, inheritance) are exempt.

Tracking and Withholding Obligations

It is then no surprise that the Government of India’s policy was intentionally designed to “disincentive and discourage” trading and while they did that, they also tracked the crypto transaction tracking activity and widened the tax base. The mechanism for tracking was the Tax Deducted at Source (TDS).

1% TDS: Section 194S mandates that a 1% TDS on the sale consideration for VDA transfers takes place, if transactions exceed a monetary threshold (₹50,000 or ₹10,000 in some cases).

Scope: The obligation to withhold applies to both Indian and non-Indian citizens, even though the withholding is itself limited to transactions where the transferor is an Indian tax resident. This obligation also extends to transactions involving barter or exchange of VDAs (crypto-for-crypto), and in that case both the buyer and seller may be mutually liable to deduct and file TDS leading to further discouragement. 

Consequences: This introduction of the 1% TDS provision, along with the high 30% tax rate, has been viewed as many and rightly so, a cause of a plunge in crypto transactions in India. This has led to many Indians shifting to global exchanges to avoid the tax complexity. 

It is no surprise that the tax rules that India has framed are surely harsh as is clear from the provisions that were added in 2022; even penal provisions have been added to ensure the taxes are paid duly. In this case let us view some major problems that come with India’s taxation policy on cryptocurrency. 

1. It does not matter how much one earns- under this tax regime, you would be taxed at a rate of 30% regardless of your income bracket. Nor do these laws differentiate between long term and short-term holdings, this in itself is enough to discourage the layman to stop from investing in cryptocurrency- there are simply no profits that would encourage one to invest in cryptocurrency.

2. Now, on top of that, if you lose money on one crypto trade, you cannot adjust or offset that loss against profits that you make from another crypto trade, or any other source of income. Now, that is exactly what will stop even the risk takers from investing.  

3. The cost of acquisition is the only deduction that is allowed when you would be calculating your taxable profit; this means that you are taxed on your gross profit and not on actual profit. This discrepancy ends up doing more harm to you than good and all the other costs that went into making the trade are sidelined and not taken into consideration- the result? More loss than profit.

4. If you don’t properly report your crypto holdings (VDAs), the government now classifies them as undisclosed income. If these unreported assets are found during a tax search, they can be taxed at extremely high rates, potentially 60% under block assessment (plus surcharge and cess).

5. 1% Tax Deducted at Source (TDS) is required on VDA transfers. If you use an Indian exchange, they handle this automatically. However, if you trade on a foreign exchange or use peer-to-peer (P2P) trading, the buyer is responsible for manually deducting and filing this 1% TDS. Failure to deduct or remit this TDS can lead to severe consequences, including penalties equivalent to the missing tax amount or even imprisonment (Section 271C- 3 months to 7 years).

6. The government has cracked down on P2P transactions, especially those done on foreign exchanges without full Know Your Customer (KYC) details. If you lack proper documentation, the Income Tax Department may classify the entire transaction amount  and not just your profit, as undisclosed income, potentially leading to huge penalties that can go as high as 78%.

7. Under the new budget of 2025, the Income Tax Department can now formally investigate and seize your digital assets - Crypto is now officially on the list of ‘seized items’. Whether it is a step forward or not; only time will tell.

8. Neither the GST Council or the Central Board of Indirect Taxes and Customs has provided a definitive official notification on whether the crypto token is currency or are they intangible goods, and therefore the tax treatment of the asset itself remains legally unsettled. It is then clear that unless and until this classification is clarified, traders and businesses operate in a legal gray area, which forces them to adopt a cautious approach.

Even to the layman, who would not know anything about cryptocurrency but at least have some basic knowledge regarding taxation; these tax laws would seem harsh and somewhat unreasonable. It is then no surprise that a significant number of crypto investors and businesses were subtly forced to move their operations to other places like Dubai, where the rules are relatively better and give the crypto investors a space to grow.

India’s response to taxing cryptocurrencies was primarily by reason of  judicial validation in 2020 which was then followed by a specific, highly restrictive tax regime focused on revenue tracking and discouragement and while some say that it does illustrate a developing economy’s struggle to assert fiscal accountability in a borderless sphere it is also quite true that in times when many are switching to cryptocurrencies for transactions, such stringent and high taxes are not the best way to tackle the problem that cryptocurrencies bring with itself. The high 30% tax, combined with the denial of loss offsets and implementation of 1% TDS, reveals a policy stance driven heavily by a need to curb money laundering and evasion in the absence of a comprehensive regulatory law but on the other side it also discourages the youth to invest in a market that can do wonders for India. Given the amount of young workforce that India has currently, such a stringent tax regime for crypto might end up doing more harm than good- while the apprehensions of the government, are no doubt, legitimate- there needs to be a revised approach to the taxation of crypto transactions; one that ensures that crypto is not used to evade taxes but simultaneously also ensures that people invest in crypto and use it to enter the global market; India, can become a hub for cryptocurrency trade- provided an efficient regulatory framework is made as soon as possible.

• Katherine Baer et al., Taxing Cryptocurrencies, 39 Oxford Rev. Econ. Pol’y 478 (2023), https://doi.org/10.1093/oxrep/grad035.

• ClearTax, Taxation on Cryptocurrency: Guide to Crypto Taxes in India (Sept. 4, 2025), https://cleartax.in/s/cryptocurrency-taxation-guide (last visited Oct. 30, 2025).

• Finance Act, 2022, No. 6 of 2022, Acts of Parliament (India).

• Shaun Parsons, Taxing Crypto-Asset Transactions: Foundations for a Globally Coordinated Approach (IBFD Doctoral Series No. 66, 2023).