Budget 2026: Are Tax Provisions Set to Benefit Crypto Asset Companies?

The Central Board of Direct Taxes (CBDT) has issued a stark warning regarding the risks associated with virtual digital assets (VDAs), including cryptocurrencies. This caution aligns with the Reserve Bank of India’s (RBI) concerns and highlights the growing skepticism among regulatory bodies about the integration of cryptocurrencies into India’s financial and taxation systems. The CBDT’s recent presentation to a Parliamentary Standing Committee of Finance emphasizes the potential revenue risks, enforcement challenges, and the possibility of misuse for tax evasion or illicit financial activities.

Challenges in Tracking Cryptocurrency Transactions

The CBDT’s concerns stem from the unique characteristics of cryptocurrencies, which include their anonymous, borderless nature and the speed of transactions. These features complicate the ability of tax authorities to track taxable income and identify beneficial ownership. The use of offshore exchanges, private wallets, and decentralized platforms further obscures transaction trails, making accurate tax assessments and recovery efforts difficult. Jurisdictional limitations exacerbate these issues, as many cryptocurrency transactions occur outside India’s regulatory reach, rendering compliance and enforcement nearly impossible.

The tax department’s warning highlights the urgent need for enhanced regulatory frameworks to address these challenges. Without effective tracking mechanisms, the potential for tax evasion increases, undermining the integrity of the financial system. As cryptocurrencies continue to gain popularity, the CBDT’s emphasis on these risks signals a critical juncture for policymakers in India.

Stringent Tax Regime for Virtual Digital Assets

India’s tax regime for virtual digital assets is among the most stringent globally. The Finance Act of 2022 introduced a specific tax framework for VDAs by amending the Income-tax Act, 1961. Under this framework, income from the transfer of VDAs is taxed at a flat rate of 30%, in addition to applicable surcharges and cess, regardless of how long the asset is held. Notably, the law permits only the cost of acquisition as a deductible expense, excluding transaction fees and other costs.

A significant aspect of this tax regime is that losses from VDAs cannot be offset against other income or even against gains from different cryptocurrencies. Additionally, these losses cannot be carried forward to future tax years. The introduction of a 1% tax deduction at source (TDS) on transfers exceeding specified thresholds further tightens liquidity for investors. Critics argue that this approach is economically counterproductive, as it discourages risk-taking and has led to a migration of trading volumes to offshore markets, complicating compliance with foreign exchange regulations.

Taxation Issues for Non-Residents

The taxation of virtual digital assets for non-residents presents additional complexities. While the provisions of section 115-BBH of the Income-tax Act apply to both residents and non-residents, the lack of clarity regarding the “situs” of a VDA poses significant challenges. For non-residents, tax liability depends on whether income is deemed to accrue or arise in India, which involves interpreting various sections of the Income-tax Act and relevant tax treaties.

Unlike tangible assets such as shares or real estate, virtual digital assets do not have a clearly defined physical or legal location. This ambiguity can lead to disputes, especially when trading occurs on global exchanges or assets are held in offshore wallets. Experts emphasize the need for legislative clarity to prevent unnecessary litigation. Some jurisdictions, like the UK, have addressed this issue by linking the situs of crypto assets to the residential status of the beneficial owner, a model that India could consider adopting.

Reporting Requirements and Future Reforms

Individuals engaged in cryptocurrency transactions must disclose their income from virtual digital assets in the Schedule VDA of their annual income tax returns, typically using ITR-2 or ITR-3 forms. This schedule requires detailed information, including acquisition and transfer dates, as well as the cost of acquisition and sale proceeds. Accurate reporting is crucial, as any discrepancies can lead to penalties and interest on unpaid taxes.

In light of the challenges posed by the current tax framework, various stakeholders are advocating for reforms in the upcoming Budget 2026. Suggested changes include allowing the offsetting of losses between different VDAs, providing clear statutory guidance on the situs of these assets, and reviewing the impact of the 1% TDS on market liquidity. As the landscape of virtual digital assets continues to evolve, these discussions will be pivotal in shaping a more effective regulatory environment.

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