Crypto, NFTs & Taxman: Don’t Get Caught Off-Guard — Everything You Must Know About Virtual Digital Assets (VDA) Taxation & TDS in India

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Crypto, NFTs & Taxman: Don’t Get Caught Off-Guard — Everything You Must Know About Virtual Digital Assets (VDA) Taxation & TDS in India



The rise of Virtual Digital Assets (VDAs) has transformed the financial and investment landscape globally. In India too, digital assets such as cryptocurrencies and NFTs (Non-Fungible Tokens) are increasingly being adopted, not just as speculative investments but also as innovative ways to transact and store value.

To regulate this rapidly growing sector, the Government of India introduced specific tax provisions applicable from FY 2022-23, including TDS obligations, flat taxation on gains, and reporting requirements. Non-compliance can attract severe penalties and trigger Income Tax notices.

This blog provides a comprehensive overview of VDA types, taxation structure, TDS compliance, and the common triggers for tax scrutiny.

📌 What Are Virtual Digital Assets (VDAs)?

Under Section 2(47A) of the Income Tax Act, Virtual Digital Assets include:

✅ 1. Cryptocurrencies

Decentralized digital currencies operating on blockchain technology.
 Examples: Bitcoin, Ethereum, Solana, Ripple, Dogecoin.

✅ 2. NFTs (Non-Fungible Tokens)

Unique digital representations of real-world or digital assets such as art, music, videos, in-game items.

✅ 3. Other Notified Digital Assets

The Government has the authority to notify other digital formats as VDAs from time to time.

💰 Taxation on Virtual Digital Assets (Effective AY 2023-24)

🧾 1. Flat 30% Tax on Gains – Section 115BBH

  • Tax @30% on income from transfer of any VDA

  • No deduction allowed for expenses other than cost of acquisition

  • No set-off or carry forward of VDA losses allowed

📌 Example: If you bought Ethereum at ₹1,50,000 and sold at ₹2,00,000, the taxable gain is ₹50,000. Tax payable = ₹15,000 + surcharge & cess.

💸 2. TDS on Transfer of VDA – Section 194S

From 1st July 2022, a TDS of 1% is applicable on the transfer value of VDAs exceeding prescribed thresholds.

✅ Threshold for TDS Deduction:

  • ₹10,000 per year for general taxpayers

  • ₹50,000 per year for Specified Persons

👥 Who is a “Specified Person”?

A Specified Person is:

  1. An Individual or HUF,

  2. Whose accounts are not required to be audited under the Income Tax Act in the previous year,

  3. And whose turnover:

    • Does not exceed ₹1 crore (in case of business), or

    • Does not exceed ₹50 lakh (in case of profession).

📌 Typically includes salaried individuals, pensioners, freelancers, or small business owners under the audit exemption limit.

📊 Who Deducts TDS & When?

Scenario

Payer

Threshold

TDS Rate

VDA transaction by regular buyer

Buyer

₹10,000

1%

VDA transaction by Specified Person

Buyer

₹50,000

1%

Transaction via Exchange

Mostly exchange (or intermediary)

As applicable

1%

🔔 In cases where consideration is in kind or partly in cash, the TDS must be deducted before the asset is transferred.

⚠️ Penalty for Non-Compliance with TDS on VDAs

Failure to deduct or deposit TDS can attract multiple penalties:

🔴 1. Interest under Section 201(1A):

  • 1% per month for delay in deduction

  • 1.5% per month for delay in deposit after deduction

🔴 2. Disallowance of Expense (Section 40(a)(ia)):

If the buyer is a business entity, the purchase cost may be disallowed in computation of business income if TDS is not deducted.

🔴 3. Penalty under Section 271C:

Equal to the amount of TDS that was failed to be deducted.

🔴 4. Prosecution under Section 276B:

In severe cases, non-payment of TDS can result in imprisonment of 3 months to 7 years along with a fine.

🚨 Common Triggers for Income Tax Notices in VDA Transactions

The Income Tax Department uses advanced AI-based tracking to detect discrepancies. Here are the red flags:

🔹 1. Non-reporting of Crypto/NFT Transactions

Most registered platforms report your transactions. Not disclosing such gains can prompt scrutiny.

🔹 2. Mismatch in AIS/Form 26AS and ITR

VDA trades are now reflected in the Annual Information Statement (AIS). Discrepancies can lead to notice under Section 148 or 139(9).

🔹 3. No TDS Deduction or Deposit

Failure to comply with Section 194S obligations can trigger notices and demand letters.

🔹 4. Holding Crypto on Foreign Platforms

Investments through global platforms like Binance or Coinbase must be declared in Schedule FA (Foreign Assets).

🔹 5. Disproportionate Investment vs Declared Income

If your VDA investments are not in line with your declared income or business profile, the department may investigate the source of funds.

✅ Best Practices to Ensure Compliance

  • Maintain accurate records of buy/sell, fees, and wallet addresses.

  • Review Form 26AS and AIS before filing your return.

  • Ensure correct classification in ITR (usually ITR-2 or ITR-3).

  • Disclose foreign crypto holdings as per Schedule FA, if applicable.

  • If you're a buyer, check whether TDS needs to be deducted.

📌 Conclusion

Virtual Digital Assets are here to stay — but so is the taxman. With dedicated provisions in place for the taxation and reporting of VDAs, it's crucial for investors and traders to stay updated and compliant.

Ignorance or negligence in TDS compliance or VDA disclosure may not only lead to penalties but also cause long-term reputational and financial consequences.

💼 Need Help Filing Your Crypto Tax Returns or Handling Tax Notices?
 ✅ Contact us for expert guidance and peace of mind.

📧 Email: itax@eaztaxbiz.com
 🌐 Website: www.eaztaxbiz.com

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