Cryptocurrency Taxation in India for Startups and Exchanges

The world of cryptocurrencies has exploded over the past decade, reshaping finance, investment, and technology. In India, where blockchain innovation is on the rise, startups and exchanges are building the future of digital finance. However, this growth also comes with strict cryptocurrency taxation laws in India that every business and investor must understand.

Since April 2022, the Indian government has officially brought cryptocurrencies under the tax net through the Finance Act, 2022, introducing clear — and often rigid — taxation rules for Virtual Digital Assets (VDAs). This step marked the first time India legally recognized and taxed crypto transactions, signaling that while digital assets aren’t banned, they are heavily regulated.

This article explains everything startups and exchanges need to know about cryptocurrency taxation in India, including the 30% tax rule, 1% TDS compliance, GST implications, and how to stay tax-compliant while running a crypto business.

What Is the Legal Framework for Cryptocurrency Taxation in India?

The Finance Act, 2022 added Section 115BBH to the Income Tax Act, 1961, creating a new tax category for Virtual Digital Assets (VDAs). This was India’s response to the growing crypto economy and the need to regulate income generated from it.

Under this framework:

• 30% flat tax applies to all income from the transfer of crypto assets or VDAs.
  

• No deduction is allowed except for the cost of acquisition.
  

• Losses from VDAs cannot be set off against other income (like salary, business profits, or capital gains from stocks).
  

• Losses also cannot be carried forward to future financial years.
  

This means that even if you lose money trading crypto, you can’t use that loss to reduce your taxable income from other sources.

The Central Board of Direct Taxes (CBDT) has clarified that these provisions are designed to bring transparency and prevent tax evasion in crypto transactions — a sector that previously operated in a regulatory gray zone.

What Are Virtual Digital Assets (VDAs)?

The Income Tax Act defines a Virtual Digital Asset as:

“Any information, code, number, or token (not being Indian or foreign currency), generated through cryptographic means or otherwise, providing a digital representation of value.”

In simpler terms, VDAs include:

• Cryptocurrencies like Bitcoin, Ethereum, Solana, and Ripple
  

• NFTs (Non-Fungible Tokens)
  

• Utility tokens and governance tokens
  

• Any other digital asset notified by the government

Virtual Digital Assets Meaning Explained with Examples (Crypto, NFTs, Tokens, etc.)

The government may exclude specific assets from this definition (such as the Digital Rupee, India’s CBDC).

How Cryptocurrency Is Taxed in India: The 30% Rule Explained

The 30% flat tax under Section 115BBH applies to any income arising from the transfer of a cryptocurrency. It doesn’t matter whether the income comes from trading, selling, or swapping tokens — any gain realized in INR is taxable.

Example:
If you buy Bitcoin worth ₹1,00,000 and sell it for ₹1,80,000, your profit of ₹80,000 will be taxed at 30%.
Tax Payable: ₹24,000 (plus 4% cess and applicable surcharge).

If, however, you sell it at a loss (say ₹80,000), that loss cannot be offset against your other income.

Key takeaways:

• Tax applies at transfer, not withdrawal.
  

• The tax rate is uniform across income levels.
  

• No exemptions or slab benefits are available.
  

• Gains from crypto-to-crypto swaps are also taxable events.
  

This approach aligns India’s stance with the principle that every crypto trade is a taxable transfer, ensuring traceability through financial systems.

TDS on Cryptocurrency Transactions: Section 194S

The 1% TDS rule under Section 194S of the Income Tax Act came into effect on 1 July 2022. It was designed to create a paper trail for crypto transactions and ensure tax collection at the source.

Who Deducts the TDS?

• The buyer (if not using an exchange) must deduct 1% of the transaction value and remit it to the government.
  

• If the transaction is facilitated by an exchange, the exchange is responsible for deducting and depositing TDS.
  

When Is TDS Applicable?

• On crypto-to-fiat and crypto-to-crypto transfers.
  

• When total transactions in a financial year exceed:
  

• ₹10,000 for individuals/businesses.
  

• ₹50,000 for individuals not having income from business/profession.
  

Example:

If you sell Ethereum worth ₹1,00,000, the exchange must deduct ₹1,000 (1%) as TDS and remit it to the government. You will receive ₹99,000 and can claim the ₹1,000 as credit when filing your income tax return.

Purpose of TDS:

• To establish transaction traceability.
  

• To ensure compliance and curb tax evasion.
  

• To provide the government with transaction data through Form 26AS and AIS.
  

GST on Cryptocurrency in India

While the transfer of cryptocurrencies is not yet specifically covered under GST law, the services provided by crypto exchanges and blockchain startups are subject to GST at 18%.

GST applies to:

• Trading fees and transaction charges
  

• Wallet management and custody services
  

• Consulting or listing services for tokens
  

• Platform access fees
  

If a startup earns service fees from Indian users, it must collect 18% GST. However, if the service is exported (for instance, serving overseas clients), it may qualify for zero-rated GST, provided all conditions under the GST law are met.

Input Tax Credit (ITC)

Crypto exchanges registered under GST can claim ITC on eligible business expenses such as hosting, advertising, or professional fees, helping reduce their net GST liability.

Cryptocurrency Taxation for Startups and Exchanges

Startups and exchanges in India are at the forefront of innovation, but they also shoulder the heaviest tax compliance burden. Here’s how different aspects of taxation apply:

Compliance Impact on Startups:

• Exchanges must integrate automated systems to track user transactions, deduct TDS, and issue Form 16A.
  

• KYC and PAN linking are mandatory to ensure proper credit of TDS to users.
  

• Misreporting can attract penalties under Section 271C of the Income Tax Act.
  

Cryptocurrency Accounting and Record-Keeping

Given the decentralized nature of crypto, meticulous record-keeping is crucial.

Startups should maintain:

• Detailed ledgers of each transaction with INR equivalent at the time of transfer.
  

• PAN-based user mapping for TDS reporting.
  

• Evidence of cost of acquisition (for tax computation).
  

• Proof of TDS remittance (Challan 281).
  

Maintaining this data helps during audits and when reconciling user accounts for income tax filings.

Tax Filing for Crypto Investors and Businesses

Income from crypto must be reported under the new Schedule VDA in the Income Tax Return (ITR).

For Individuals:

• Report income from VDA transfers separately.
  

• Claim TDS credits reflected in Form 26AS or Annual Information Statement (AIS).
  

• Pay any remaining tax before the filing deadline.
  

For Exchanges and Startups:

• File quarterly TDS returns (Form 26Q).
  

• Deposit deducted tax by the 7th of the following month.
  

• File monthly GST returns (GSTR-3B) and annual return (GSTR-9).
  

Challenges in Cryptocurrency Taxation in India

1. Lack of classification clarity: Crypto can function as an asset, commodity, or utility — each may attract different tax interpretations.
   

2. Double taxation risk: 30% income tax plus 1% TDS and 18% GST can lead to cascading effects on profits.
   

3. Evolving global standards: Indian startups must monitor international tax laws to avoid double taxation in cross-border operations.
   

4. Regulatory ambiguity: Future legislation such as the proposed Digital India Bill could alter definitions and compliance requirements.
   

Best Practices for Crypto Startups and Exchanges

To remain compliant and competitive, startups should:

• Integrate automated tax systems to handle TDS and GST seamlessly.
  

• Educate users through dashboards that show net proceeds after tax.
  

• Hire crypto tax professionals who understand blockchain-specific accounting.
  

• Maintain clear separation between business income and VDA gains.
  

• Conduct quarterly tax audits to ensure timely reporting.
  

The Future of Cryptocurrency Taxation in India

India’s taxation framework indicates that the government prefers regulation over prohibition. The Ministry of Finance is currently working with international organizations like the OECD and FATF to develop a global tax reporting framework for crypto assets (similar to the Common Reporting Standard for bank accounts).

As regulations evolve, future amendments may introduce:

• Differential tax rates for short-term and long-term holding of crypto.
  

• Clear GST classification for VDA transactions.
  

• Cross-border tax guidelines for foreign exchanges operating in India.
  

These developments could create a more balanced ecosystem for legitimate startups and exchanges operating within India’s regulatory framework.

Conclusion

Cryptocurrency taxation in India has moved from ambiguity to enforcement. The 30% tax under Section 115BBH, 1% TDS under Section 194S, and GST on crypto services form a comprehensive yet complex structure.

For startups and exchanges, tax compliance must now be treated as a core operational function, not a back-office formality. Building transparent systems, maintaining proper accounting, and staying updated with policy changes can help businesses thrive in India’s rapidly evolving crypto ecosystem.

By aligning with these frameworks, India’s crypto entrepreneurs can not only stay compliant but also build public trust — laying the foundation for a sustainable digital asset economy.