Crypto & VDA Taxation: Section 115BBH's Flat 30%, TDS 194S, and Why Your Loss Doesn't Help You

Every crypto investor we sit down with in Raipur arrives with roughly the same misconception: that a loss on one coin can be set off against a gain on another, the way it works for equity or mutual funds. It cannot. The Virtual Digital Asset tax regime was deliberately built to be unforgiving in exactly this respect, and it remains one of the most misunderstood parts of the income tax framework — not because the law is unclear, but because it contradicts how every other capital asset in the Act is taxed.

The Flat 30% Rule — Section 115BBH

For income earned in FY 2025-26 (the period currently being reported and assessed, still governed by the Income Tax Act, 1961), gains from transfer of a Virtual Digital Asset are taxed under Section 115BBH at a flat 30%, plus applicable surcharge and 4% health and education cess. Three features make this regime distinct from ordinary capital gains taxation:

1. No deduction for any expenditure other than the cost of acquisition. Transaction fees, exchange charges, internet costs, or any other expense connected with the transfer cannot be claimed — only what was actually paid to acquire the asset is deductible from the sale consideration.
2. No set-off of loss from transfer of one VDA against income from transfer of any other VDA, or against any other head of income. A loss booked on Ethereum cannot reduce a gain booked on Bitcoin in the same year — each transaction is, in effect, taxed in isolation.
3. No carry-forward of loss to subsequent years. A VDA loss that cannot be absorbed in the year it arises simply disappears for tax purposes; it does not roll forward the way a capital loss under Section 74 does.
4. The flat 30% applies irrespective of holding period and irrespective of the taxpayer's income slab. There is no long-term versus short-term distinction, no indexation benefit, and no relief even for a taxpayer whose total income would otherwise fall in the nil-tax bracket — the 30% rate on VDA gains is not displaced by the basic exemption limit.

A gift of a VDA is also taxable in the recipient's hands under the residual "income from other sources" gift-taxation provisions where its value exceeds the standard threshold, and — a point that surprises people — even that gift-received value, if later sold at a further gain, is computed under the same Section 115BBH mechanics for the subsequent transfer.

TDS Under Section 194S

Every transfer of a Virtual Digital Asset above the prescribed threshold attracts 1% TDS under Section 194S, deducted by the person responsible for paying the consideration — in practice, this is usually the exchange itself for on-platform trades, or the buyer directly in a peer-to-peer transaction. Key points that continue to generate notices:

• The TDS is deducted on the gross consideration, not on the gain — this is a liquidity drag even on a loss-making trade, since 1% is withheld regardless of whether the transaction was profitable.
• TDS credit reflected in Form 26AS and the Annual Information Statement (AIS) must be reconciled transaction-by-transaction against actual exchange statements before filing, because exchange-reported figures and AIS entries frequently diverge, particularly for high-frequency traders running multiple trades a day across more than one platform.
• Peer-to-peer transfers, and transfers through exchanges not complying with the deduction obligation, still create a tax liability for the seller under Section 115BBH even where no TDS was actually withheld — the absence of TDS does not mean the absence of tax.

Reporting: Schedule VDA in the ITR

Income from transfer of Virtual Digital Assets must be separately reported in Schedule VDA of the applicable ITR form — it cannot be clubbed into the general capital gains schedule, and it cannot be reported under presumptive taxation provisions even where the taxpayer otherwise qualifies for presumptive schemes on business income. Each transfer requires date of acquisition, date of transfer, cost of acquisition, sale consideration, and the resulting income to be disclosed individually, coin by coin and transaction by transaction — a genuinely heavy compliance burden for an active trader, which is exactly why exchange-generated tax reports (or a dedicated crypto tax computation tool) have become close to essential rather than optional for anyone trading beyond a handful of transactions a year.

A mismatch between the AIS-reported TDS and Schedule VDA's disclosed transaction value is one of the more common triggers for an automated e-verification notice under Section 143(1) in this category — the fix is reconciliation before filing, not an explanation after the fact.

Practitioner Note: The single costliest mistake we see is a client who nets their gains and losses across coins before reporting — reasoning, reasonably enough, that it's the net position that reflects real economic profit. The Act does not agree. Every loss-making transfer has to be reported and taxed as zero (no negative figure carried anywhere), while every gain-making transfer is taxed in full at 30%, and the two do not touch each other. A portfolio that is flat or even net negative for the year can still generate a real tax bill if the winning trades and losing trades aren't handled correctly on paper.

What Changes Under the Income Tax Act, 2025

The Income Tax Act, 2025 renumbers the entire statute and becomes the operative law for income earned from Tax Year 2026-27 onward — that is, income earned from 1st April 2026, first reported in the return filed in mid-2027. Under the new Act, the VDA taxation provision is consolidated into Section 194(1), carrying forward the same substantive 30% flat-rate mechanism, the same denial of loss set-off and carry-forward, and the same restriction on deductible expenditure — this is a renumbering exercise, not a rate or policy change. Filings for income earned before 1st April 2026, including the return you are likely filing this year for FY 2025-26, continue to reference Section 115BBH and Section 194S under the 1961 Act, because that is the law that was in force when that income was actually earned.

The practical takeaway for anyone trading VDAs right now: keep transaction records organised by the old section numbers for anything before 1st April 2026, and be ready to see the same rules reappear under new numbering — Section 194(1) — for transactions from that date onward. The economics of the regime are not changing; only the citation is.

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