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Crypto in Indian law: virtual digital assets, tax and PMLA cover

By CAShorts DeskPublished Source: The Hindu; Finance Bill, 2022 and Memorandum (Ministry of Finance); Gazette of India; PIB

Why in news: A cyberattack on the Binance exchange on 29 October 2026 caused losses valued at over $6 billion.

Crypto in Indian law: virtual digital assets, tax and PMLA cover
Illustration (AI-generated)

A virtual digital asset (VDA) is the Income-tax law's name for crypto tokens, non-fungible tokens and similar tokens. The Finance Act, 2022 taxes VDA gains at 30% and deducts 1% at source on transfers. VDA businesses came under anti-money-laundering law in March 2023. A cyberattack on the Binance exchange on 29 October 2026 caused losses of over $6 billion.

Syllabus: GS3 · Indian Economy & Growth; GS3 · IT, Space, Biotech & IPR; GS3 · Cyber Security & Money Laundering

Why this matters for UPSC

GS3 economy and internal security: taxing crypto, money laundering and the RBI's digital rupee. Prelims can ask the VDA tax rules and PMLA cover; Mains, whether to regulate crypto.

In short

A virtual digital asset (VDA) is the Income-tax law's term for crypto tokens and similar digital stores of value. India taxes and polices them, but does not regulate them.

How India treats VDAsFlat 30% taxNo loss relief1% at sourceFive activitiesunder PMLAE-rupee versusprivate crypto

India has chosen to tax and trace crypto without regulating it; a clear regulator would protect savers while keeping laundering and tax checks intact.

Why it matters

A person who buys and sells crypto tokens in India pays 30% on every gain and cannot offset a loss on one token against a profit elsewhere. So a trader who wins on one trade and loses on another still pays tax on the win. Most sales also leave a tax trail, because the buyer or platform deducts tax at source. Platforms that hold or swap tokens for customers must follow money-laundering rules, which makes it harder to move criminal money through them. Yet no regulator protects a saver if an exchange is hacked, a risk the October 2026 attack on a large exchange brought back into view. The larger question is whether India should tax, regulate or replace private tokens with its own digital rupee.

Prelims pointers

  • The words 'currency', 'Indian currency' and 'foreign currency' in the VDA definition take their meanings from the Foreign Exchange Management Act, 1999.
  • The PMLA notification of 2023 adopts the Income-tax Act's meaning of virtual digital asset; it was issued by the Finance Ministry's Department of Revenue.
  • The five VDA activities under the PMLA: exchange between VDAs and fiat currencies, exchange between VDAs, transfer, safekeeping or administration, and financial services for an issuer's offer and sale.
  • No 1% deduction applies when a specified person pays up to Rs 50,000 in a year, or any other payer up to Rs 10,000.
  • The e-rupee is a digital token representing legal tender, issued by the RBI as a central bank liability; the Finance Ministry calls crypto assets unregulated (2023).
  • The retail e-rupee comes in the same denominations as notes and coins, reaches users through banks, and earns no interest, as cash does not.
  • In the RBI's pilot, the e-rupee wallet is separate because the e-rupee belongs to the currency system, while other digital wallets belong to the payments system.

Practise a UPSC-style question

With reference to the taxation of virtual digital assets (VDAs) in India, consider the following statements:

1. Income from the transfer of a VDA is taxed at 30%, and only the cost of acquisition may be deducted.

2. A loss on the transfer of a VDA may be carried forward and set off against VDA gains of later years.

3. Tax is deducted at source at 1% on payments made to a resident for the transfer of a VDA.

Which of the statements given above is/are correct?

  1. (a) 1 and 2 only
  2. (b) 2 and 3 only
  3. (c) 1 and 3 only
  4. (d) 1, 2 and 3
Show the answer

Answer: (c) 1 and 3 only

Answer: (c) 1 and 3 only. The 30% tax and the 1% deduction stand; loss relief does not.

Statement 1: correct. The Finance Act, 2022 taxes income from a VDA transfer at 30% and allows no deduction except the cost of acquisition.

Statement 2: incorrect. A VDA loss cannot be set off against other income and cannot be carried forward to later assessment years.

Statement 3: correct. A payer deducts 1% of the sum paid to a resident for a VDA transfer, a rule that began on 1 July 2022.

Eliminate: statement 2 is the surest, since the law bars carrying a VDA loss forward. Out: (a), (b), (d).

Trap: Sounds right. Ordinary capital losses can often be carried forward, so the same relief for VDAs sounds natural, but the 2022 scheme bars it.

Remember: VDA gains pay a flat 30%; VDA losses give no relief at all.

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