Taxation of Cryptocurrency Transactions in India: Policy Framework and Compliance Challenges

Abstract

I. INTRODUCTION Cryptocurrency has rapidly transformed from a niche technological curiosity to a mainstream financial asset with millions of participants across the globe, and India is no exception to this trend. By 2022, India was estimated to have one of the largest populations of cryptocurrency holders in the world, with figures ranging from 10 to 20 crore users according to various industry reports. This explosive growth brought an urgent question to the forefront of Indian tax policy: how should gains and income arising from such digital assets be taxed, and how should compliance be ensured in a space that has historically operated in a regulatory grey zone? The term cryptocurrency, or more broadly Virtual Digital Asset (VDA), refers to any information, code, number, or token - other than Indian currency or foreign currency — generated through cryptographic means, providing a digital representation of value exchanged with or without consideration. Bitcoin, Ethereum, and a wide spectrum of altcoins and non-fungible tokens (NFTs) fall under this definition as formally adopted in India's Finance Act 2022. The Finance Act 2022 was a watershed moment in India's regulatory journey with digital assets. It introduced Section 115BBH into the Income Tax Act, 1961, which imposed a flat 30% tax on income arising from the transfer of VDAs, irrespective of the holding period or the taxpayer's income slab. Simultaneously, Section 194S mandated Tax Deducted at Source (TDS) at 1% on payments related to VDA transfers, placing the obligation on crypto exchanges and certain buyers to withhold tax at the point of transaction. These twin provisions created a definitive, if controversial, legal framework for cryptocurrency taxation in India.