Introduction

The Indian government has taken a significant step toward regulating Virtual Digital Assets (VDAs) through the Income Tax Bill, 2025, which explicitly classifies them as property and capital assets. This move aligns India’s approach with global taxation practices and establishes a structured framework for taxing, regulating, and even seizing digital assets when necessary. The bill sets forth clear definitions and taxation rules, ensuring that VDAs do not remain in a legal grey area. However, while the new policy improves oversight and compliance, it also raises questions about investor protection, regulatory gaps, and the need for a cohesive legal framework.

The Growing Need for Regulating VDAs

• The rise of blockchain technology and digital assets has significantly reshaped global finance, prompting governments worldwide to reconsider their regulatory approaches.
• Countries such as the United States, the United Kingdom, Singapore, Australia, and the UAE have classified VDAs as either property or securities, allowing for proper taxation and legal control.
• India, until recently, lacked a structured framework for VDAs, leading to concerns about illicit financial activities, tax evasion, and unregulated transactions.
• The Income Tax Bill, 2025 brings much-needed clarity by defining VDAs under Section 2(111) and treating them as property and capital assets under Section 92(5)(f) and Section 76(1), respectively.
• This classification has significant implications for taxation, compliance, and legal enforcement, ensuring that India’s financial system remains robust in the face of evolving digital asset markets.

VDAs as Property and Capital Assets: Key Implications

For the first time, India has explicitly categorized VDAs—such as cryptocurrencies, Non-Fungible Tokens (NFTs), and similar digital assets—as property and capital assets. This classification places digital assets in the same category as real estate, stocks, and bonds, meaning that transactions involving these assets will be subject to capital gains tax.

Capital Gains Tax on VDAs

Under Section 76(1) of the bill, any profit generated from the sale, transfer, or exchange of VDAs will be taxed as capital gains. The tax treatment depends on the holding period of the asset:

• Short-Term Capital Gains Tax (STCG): If a VDA is sold within a short holding period, profits will be taxed at the applicable short-term capital gains tax rate.
• Long-Term Capital Gains Tax (LTCG): If the asset is held for a longer period, the gains will be taxed at the long-term capital gains rate, similar to real estate and stocks.

For example, if an investor buys Bitcoin for ₹10 lakh and later sells it for ₹20 lakh, the ₹10 lakh profit will be subject to capital gains tax, following standard taxation rules for capital assets.

This classification aligns with international practices, where:

• The U.K. treats crypto assets as property, subjecting them to Capital Gains Tax (CGT).
• New Zealand’s Inland Revenue Department also recognizes crypto assets as property, making them taxable under income tax laws.

By following this global trend, India is ensuring that VDA transactions do not remain unregulated financial instruments, closing potential loopholes in the taxation system.

Taxation Structure for VDAs

The bill continues the 30% tax on income from VDA transfers, first introduced in 2022. However, unlike other capital assets, no deductions are allowed except for the cost of acquisition.

Key Tax Provisions on VDAs:

1. Flat 30% Tax:

• Any gains from the sale or transfer of VDAs are taxed at a fixed 30% rate.
• Unlike other capital assets, no deductions are permitted for expenses such as transaction fees, platform commissions, or mining costs.
• Example: If an investor buys Ethereum for ₹5 lakh and sells it for ₹7 lakh, the ₹2 lakh profit is taxed at 30%, even if transaction costs were high.

2. 1% Tax Deducted at Source (TDS):

• A 1% TDS is applicable on all VDA transfers, even for peer-to-peer (P2P) transactions.
• The TDS exemption threshold is ₹50,000 for small traders and ₹10,000 for others.
• This ensures that large crypto transactions are tracked by the government.

Comparison with International Tax Policies

India’s tax treatment of VDAs is stricter than in some other countries. For instance:

• In the UAE, crypto traders enjoy a 0% personal income tax on VDA gains under regulated conditions.
• Singapore also does not impose a capital gains tax on cryptocurrencies.
• The U.S. taxes crypto as securities, bringing them under financial market regulations but allowing for deductible expenses.

While India’s stringent tax approach ensures better oversight, it could also discourage innovation and investment in the digital asset sector.

Inclusion in Undisclosed Income and Asset Seizure Regulations

A critical component of the bill is the inclusion of VDAs in undisclosed income taxation and asset seizure laws.

Key Provisions on Compliance and Seizure

1. Undisclosed Income Taxation (Section 301): If an individual fails to report their VDA holdings in tax filings, these assets can be classified as undisclosed income and taxed accordingly.
2. Asset Seizure (Section 524(1)): Tax authorities can seize VDAs in investigations or tax raids, just as they do with cash, gold, or real estate. This prevents VDAs from becoming a shadow asset class, free from regulatory scrutiny.

Global Precedents for VDA Seizure

• The K. High Court has ruled that crypto assets qualify as property, allowing authorities to freeze or seize them in legal cases.
• The S. Securities and Exchange Commission (SEC) treats many crypto assets as securities, subjecting them to strict enforcement measures.

By adopting similar regulations, India strengthens its ability to prevent money laundering, tax evasion, and illicit financial activities associated with VDAs.

Mandatory Reporting of Crypto Transactions

• Under Section 509, any entity dealing in VDAs—including: Crypto exchanges, Wallet providers, Individual traders—must report transactions in a prescribed format. This provision is aimed at preventing money laundering through digital assets.
• Additionally, VDAs will now be included in Annual Information Statements (AIS), ensuring that all crypto transactions are recorded in taxpayers’ financial profiles.

The Need for a Comprehensive Regulatory Framework

While the Income Tax Bill, 2025 establishes a clear taxation policy, India still lacks a comprehensive regulatory framework for VDAs.

Key Gaps in India’s Current Approach

1. No Investor Protection Mechanism: Unlike stock market regulations, there are no safeguards for crypto investors in case of fraud or exchange collapses.
2. Unclear Market Regulations: The bill addresses taxation but does not establish a clear framework for regulating crypto exchanges or determining the legality of Initial Coin Offerings (ICOs).
3. Lack of Global Standardization: India needs to align with global best practices by integrating financial regulations, consumer protection, and blockchain governance into its legal framework.

Conclusion: A Step Forward, But More Work Needed

India’s decision to classify VDAs as property and capital assets represents a significant step towards regulatory clarity. By imposing capital gains tax, enforcing transaction tracking, and enabling asset seizure, the government ensures greater financial transparency.

However, without a comprehensive legal framework, critical gaps remain in investor protection, exchange regulation, and enforcement mechanisms. To fully integrate VDAs into the mainstream economy, India must develop a unified policy framework that balances taxation, regulation, and innovation.

While the new tax laws provide structure, the future of VDAs in India depends on how well regulatory authorities bridge the remaining gaps and create a balanced, secure digital asset ecosystem.