Budget 2026: Will tax provisions ease for crypto assets? – The Times of India

The Central Board of Direct Taxes (CBDT) has raised fresh concerns about the risks posed by virtual digital assets (VDAs) such as cryptocurrencies, aligning its stance with that of the Reserve Bank of India (RBI). The tax department’s warning presented recently to a Parliamentary Standing Committee of Finance underscores regulatory agencies’ growing scepticism about cryptocurrencies fit within India’s financial and taxation framework. It highlights revenue risks, enforcement gaps and potential misuse for evasion or illicit finance.Key concerns flagged:

A tax framework that bites:The tax regime in India, for VDAs can be considered as one of the most stringent in the world.The Finance Act, 2022, ushered in a bespoke tax regime for VDAs by inserting section 115-BBH into the Income-tax Act, 1961 (I-T Act). Income from the transfer of VDAs is taxed at a flat 30%, plus surcharge and cess, regardless of the holding period. The law allows only the cost of acquisition as a deduction, barring transaction fees, exchange charges or other expenses.More critically, losses from VDAs cannot be set off — not against other income, nor even against gains from another crypto asset. Losses also cannot be carried forward. A parallel provision mandates 1% tax deduction at source (TDS) on transfers beyond specified thresholds, further tightening liquidity. To illustrate: For a salaried individual, a 1% TDS is applicable on transfer of the VDAs if the transaction amount exceeds ­10,000.Various associations have in their pre budget submissions, argued that disallowing set-off of losses between VDAs is economically distortive and ultimately counterproductive for tax revenues.The argument is simple: when losses are ring-fenced, but gains are fully taxed, risk-taking is penalised asymmetrically. This has reportedly contributed to trading volumes migrating offshore, exchanges shifting operations overseas and Indian investors being pushed into cross-border structures that raise FEMA and compliance complexities.The result is a tax structure that treats crypto trading far more harshly than equities, real estate or even speculative assets, despite its growing mainstream adoption.Non-residents and the unresolved ‘situs’ question:While section 115-BBH of the I-T Act, applies equally to residents and non-residents, tax provisions are not clear on a crucial issue: where is a VDA located? For non-residents, taxability hinges on whether income accrues or arises in India (the provisions of sections 5 and 9 of the I-T Act and the relevant tax treaty provisions come into play).Unlike shares or immovable property, VDAs lack a clearly identifiable physical or legal location. In the absence of legislative clarity on the situs of crypto assets, non-resident taxation risks becoming a fertile ground for disputes particularly where trading occurs on global exchanges, assets are held in offshore wallets and sale proceeds are received outside India.Experts point out that clarity is essential to avoid avoidable litigation. Jurisdictions such as the UK offer guidance by linking the situs of crypto assets to the residential status of the beneficial owner, an approach India could adapt.Reporting income from VDAs:Individuals dealing in cryptocurrencies are required to disclose income from virtual digital assets in Schedule VDA of their annual income tax returns — typically ITR-2 or ITR-3, depending on their income profile. The schedule seeks granular information, including the date of acquisition and transfer, cost of acquisition and sale consideration. Accurate reporting is crucial, as any under-reporting or misreporting of VDA income can attract penalties, apart from interest on unpaid tax.Suggestions for Budget 2026:Possible reforms being discussed in policy circles include: