Tax on Crypto and NFT Trading: Practical Scenarios

As India continues to embrace digital transformation, cryptocurrencies and NFTs (Non-Fungible Tokens) have emerged as new investment avenues. With this growth, the Indian government has introduced a defined framework for taxing these digital assets. Understanding the crypto tax in India is now crucial for traders, investors, and even creators of digital assets. This blog explores practical scenarios and provides clarity on the tax implications of crypto and NFT transactions.

Understanding the Basics of Crypto Tax in India

The Finance Act, 2022 introduced Section 115BBH to the Income Tax Act, which deals specifically with the crypto tax in India. It classifies cryptocurrencies and NFTs as Virtual Digital Assets (VDAs) and lays down strict tax provisions.

Key points of crypto tax provisions in India:

• A flat 30% tax on gains from transfer of VDAs, without any deductions (except cost of acquisition).

• 1% TDS (Tax Deducted at Source) on transfer of VDAs if consideration exceeds ₹50,000 (₹10,000 in some cases).

• Losses from VDA transfers cannot be set off against other income or carried forward.

Let’s understand how these rules play out in real-life trading scenarios.

Scenario 1: Buying and Selling Crypto for Profit

Example: Rhea buys Bitcoin worth ₹1,00,000 and sells it for ₹1,50,000 after 3 months.

• Profit = ₹50,000

• Tax Liability = 30% of ₹50,000 = ₹15,000

• Net Gain = ₹35,000 (after tax)

Even though Rhea held the asset for a short period, crypto tax in India does not distinguish between long-term and short-term gains. Every gain is taxed at the same rate, regardless of holding period.

Scenario 2: Losses from Crypto Trading

Example: Arun invests ₹2,00,000 in Ethereum, which drops to ₹1,50,000 at the time of sale.

• Loss = ₹50,000

• Tax Liability = ₹0

• Can the loss be set off? No

As per current law, losses incurred under Section 115BBH (VDAs) cannot be adjusted against gains from other assets or income heads. This limitation makes risk management more critical for crypto traders facing crypto tax in India.

Scenario 3: NFT Sale by a Digital Artist

Example: Meena, a graphic designer, creates an NFT and sells it for ₹2,00,000 on a marketplace.

• The amount received is treated as income from VDA.

• Tax = 30% of ₹2,00,000 = ₹60,000

• She also pays TDS if the buyer is Indian and the transaction exceeds ₹50,000.

This example highlights that even NFT creators need to be mindful of crypto tax in India, even if they aren’t traders in the conventional sense.

Scenario 4: Receiving Crypto as a Gift

Example: Priya receives 0.01 BTC (worth ₹50,000) from a friend.

• If the crypto is received without consideration and the value exceeds ₹50,000, it is taxed as income under ‘Other Sources’.

• Tax = 30% of ₹50,000 = ₹15,000

This is another scenario where crypto tax in India treats crypto differently from traditional gifts, especially when the transaction crosses a certain threshold.

Scenario 5: Crypto-to-Crypto Trading

Example: Aman exchanges Ethereum worth ₹1,00,000 for Solana worth ₹1,20,000.

• Technically, Aman has made a gain of ₹20,000.

• Tax = ₹6,000 (30%)

• This triggers a taxable event even though no fiat currency was involved.

One of the biggest challenges in crypto tax in India is the recognition of “transfer” even in barter-like trades. So every crypto-to-crypto swap is subject to tax reporting.

Scenario 6: Mining Rewards

Example: Ravi mines crypto and earns 0.05 BTC worth ₹2,00,000.

• Mining is treated as income from business or other sources (not capital gains).

• Entire ₹2,00,000 is taxable at normal slab rates.

• Additionally, when he later sells the mined crypto, it will be taxed again under Section 115BBH.

While mining isn’t common for all, those involved must consider crypto tax in India on both mining income and eventual sale.

Scenario 7: Airdrops and Token Rewards

Example: Neha receives free tokens from a project launch, valued at ₹10,000.

• This is treated as income and taxed at slab rate initially.

• Later, when sold, any appreciation will be taxed at 30%.

This two-step tax treatment is an important consideration under the crypto tax in India regime. Both receiving and transferring attract separate taxes.

TDS Compliance: What Traders Must Know

Under Section 194S of the Income Tax Act, 1% TDS must be deducted on VDA transactions exceeding ₹50,000 annually (₹10,000 for specified persons).

Who deducts TDS?

• If trading on Indian exchanges, the platform typically deducts it.

• In peer-to-peer or international trades, the buyer has the onus to deduct and deposit the TDS.

Failure to comply can result in penalties, which makes TDS a vital part of crypto tax in India compliance.

Best Practices for Crypto Tax Compliance

1. Maintain detailed records: Keep track of dates, asset types, values at acquisition and sale, and counterparties.

2. Use tax-compliant exchanges: Many Indian platforms help automate tax and TDS tracking.

3. File ITR correctly: Report crypto income under the correct head — capital gains or business, depending on activity.

4. Watch for updates: Crypto tax laws in India are evolving; stay informed through CBDT notifications and Finance Acts.

Conclusion

Navigating the world of digital assets is exciting, but ignoring tax obligations can be costly. With the government tightening the net around virtual assets, being aware of practical use cases helps traders and investors remain compliant. Whether you’re flipping Bitcoin, minting NFTs, or holding tokens for the long term, understanding the crypto tax in India is no longer optional — it’s a financial necessity.

By recognizing how tax laws apply to varied scenarios, you not only avoid penalties but also plan better for your digital investments. Stay informed, maintain transparency, and consult a tax expert if you’re unsure how to proceed.