Crypto Taxation Under the Income-Tax Bill, 2025: From Capital Gains to VDA Classification
In 2025’s humming digital markets where Bitcoin flirts with fresh highs and NFTs are traded as casually as collectibles Indian crypto investors are navigating more than market volatility. They are walking a regulatory tightrope. Imagine a Mumbai-based founder liquidating Ethereum accumulated in 2020, only to discover that the tax consequences fundamentally reshape the profitability of that exit. This is no longer a hypothetical concern. It is the lived reality after the Income-Tax Bill, 2025, which embeds Virtual Digital Assets (VDAs) within India’s tax architecture.
The era of interpretative ambiguity is over. Where crypto once hovered uneasily within the capital gains framework, the 2025 Bill draws a clear line. VDAs are no longer incidental assets caught within legacy definitions, they are a self-contained taxable class. The promise is certainty. The price is heightened compliance. With clarifications on pre-2022 holdings, recalibrated TDS obligations, and SEBI’s expanding supervisory footprint, the crypto ecosystem is now governed with a precision that mirrors its underlying technology. For advisors and law firms, this represents both challenge and opportunity: guiding clients through a regime that is clearer, but far less forgiving. India’s tryst with cryptocurrency began cautiously. In 2018, the Reserve Bank of India drew the first hard line, cutting crypto platforms off from the formal banking system. For a time, the market froze. That freeze thawed in 2020, when the Supreme Court stepped in and restored access, effectively signaling that crypto, while risky, could not simply be regulated out of existence.
What followed during 2020–21 was a period of explosive growth. Indians traded, invested, and built on crypto rails but taxation lagged behind. Gains were reported, often uneasily, under traditional capital gains provisions, leaving both taxpayers and the tax department guessing.
The guessing ended in 2022. The Finance Act introduced a flat 30% tax on Virtual Digital Assets and a 1% TDS on every transfer, transforming crypto from a grey asset into a revenue line item. By 2024, enforcement tightened and collections rose. The Income-Tax Bill, 2025 completes this journey by moving crypto from tolerated ambiguity to a clearly defined, fully taxable digital economy asset. This article examines the Bill’s architecture, traces its evolution, and distils practical consequences for investors and advisors alike. The taxman, it appears, has learned to speak blockchain.
The Pre-2025 Backdrop: From Regulatory Vacuum to Fiscal Discipline
To appreciate the 2025 framework, one must revisit crypto’s uneasy adolescence in India. In the early 2020s, cryptocurrencies existed in a regulatory grey zone. The Reserve Bank of India’s 2018 circular, effectively severing banking access for crypto platforms, cast a chilling effect until the Supreme Court’s 2020 decision restored oxygen to the sector. Participation surged, but taxation lagged behind.
Under the Income-tax Act, 1961, cryptocurrencies were loosely categorised as “capital assets.” Gains were taxed according to holding period long-term or short-term at rates stretching to 42.744% including surcharge and cess. Indexation benefits applied, losses could be offset, and transaction-related expenses were deductible. For investors, the regime was permissive, if not indulgent.
That latitude ended with the Finance Act, 2022. Section 115 (BBH) as it introduced a flat 30% tax on VDA income, augmented by a 4% cess. Deductions were stripped down to the bare minimum the cost of acquisition alone survived. Losses became siloed, incapable of being set off or carried forward. Compounding this was Section 194S, mandating 1% TDS on transfers exceeding prescribed thresholds. By FY 2023-24, collections crossed ₹1,000 crore, but dissatisfaction grew louder: concerns of over-taxation, liquidity drain, and dampened innovation became commonplace.
The Income-Tax Bill, 2025 does not dismantle this framework. Instead, it consolidates and refines it. Introduced in February and enacted by August, the Bill reflects a post-election policy recalibration. Under the banner of “Viksit Bharat,” crypto is no longer treated as a speculative nuisance but as a legitimate, taxable economic activity regulated, monetised, and monitored.
Recasting VDAs: A Definitive Break from Capital Gains
At the core of the Bill lies a rearticulated definition of VDAs consolidated under Section 2(47A). The scope now extends well beyond the skeletal formulation of 2022. Digitokens, play-to-earn assets, and even metaverse land parcels fall within its ambit where they represent “digital value.” This expansion is not cosmetic, it is anticipatory, designed to capture assets that did not meaningfully exist when earlier provisions were drafted.
The consequence is decisive, VDAs are formally severed from the capital gains regime. Holding period is rendered irrelevant. All transfers post-1 April 2022 are taxed uniformly at 30%, irrespective of whether the asset was held for months or years. However, the Bill introduces a measured concession for legacy holdings. Where assets acquired prior to 2022 are sold later, taxpayers may elect a deemed acquisition cost equal to the fair market value as on 31 March 2022. This mechanism prevents the taxation of notional gains accrued during a period of legal uncertainty.
For investors, the relief is real but conditional. The election must be disclosed in the return of income for the year of transfer. Failure to do so risks reassessment under Section 147, reopening transactions long thought settled.
TDS, Retroactivity, and the Compliance Net
The TDS framework under Section 194 (S) is also recalibrated. Thresholds for non-specified persons are raised, providing marginal relief to retail participants. At the same time, compliance obligations for exchanges and intermediaries are tightened. Quarterly remittances, AI-assisted reconciliation, and expense disallowances for non-compliance ensure that leakage is minimised.
Retroactivity remains the most contentious element. The Bill draws a careful distinction: pre-2022 transfers already reported under capital gains provisions are insulated from reopening. Undisclosed transactions, however, face renewed scrutiny, with undeclared VDAs potentially attracting benami implications. Ongoing constitutional challenges underscore the delicate balance between revenue protection and taxpayer rights.
SEBI Steps In: Where Tax Meets Regulation
The 2025 framework does not operate in isolation. It explicitly contemplates regulatory convergence, particularly with SEBI. Tokens exhibiting security-like features tokenised equities, fractional ownership instruments, or profit-linked NFTs may now attract securities regulation alongside tax obligations. Where such assets resemble collective investment schemes, income may be re-characterised as business income, taxable at slab rates rather than under Section 115.
For market participants, this dual oversight raises the compliance bar significantly. Reporting obligations multiply, audit trails deepen, and PMLA exposure becomes a real consideration. Structuring, therefore, is no longer optional; it is essential.
What This Means in Practice
For individual investors, the message is clear, meticulous documentation is no longer a best practice it is a necessity. FIFO accounting, blockchain-based evidence, and timely filings form the backbone of defensible compliance. For businesses, classification risks loom large, particularly in areas such as mining, staking, and DeFi participation.
There are, however, strategic openings. Certain digital assets remain outside the VDA regime, and the Bill’s built-in review clause signals a willingness to recalibrate in line with global standards. GIFT City’s sandbox incentives further suggest that innovation, while regulated, is not unwelcome.
Conclusion
The Income-Tax Bill, 2025 marks the end of crypto’s fiscal adolescence in India. What emerges is a mature, if stringent, regime one that prizes clarity over concession and compliance over experimentation. For investors and advisors alike, the task ahead is not resistance but adaptation. Crypto may still be volatile, but its tax treatment no longer is. The Income-Tax Bill, 2025 marks the moment when cryptocurrency in India finally outgrows regulatory adolescence. What began as a loosely governed experiment has now been drawn firmly into the tax net, not through prohibition, but through classification. By severing VDAs from the capital gains framework and subjecting them to a uniform, non-concessional tax regime, Parliament has chosen certainty over flexibility and revenue assurance over interpretative leeway.
For investors, this clarity comes at a price. The flat 30% tax, restricted deductions, and ring-fenced losses demand a recalibration of risk-reward calculations. For businesses and intermediaries, the convergence of tax enforcement with SEBI oversight raises the compliance threshold significantly, leaving little room for informal structuring or casual reporting. The era of “crypto exceptionalism” is over.
Yet, the Bill is not entirely unforgiving. Transitional relief for legacy holdings, enhanced reporting thresholds, and a built-in review horizon suggest a regulatory posture that remains responsive, if cautious. As global standards evolve and digital assets mature, India’s framework leaves space however narrow for future rationalisation.
Ultimately, the 2025 regime does not ask whether crypto should exist, it assumes that it will. The real question now is not legitimacy, but discipline.
Contributed By:- Siddharth Bankal (Intern)