Ruthika Haller is a Fifth-year student at the PES University.
The recently introduced Income Tax Act, 2025, contains 536 sections, which is 298 sections more than the current Income Tax Act in force. Yet, we’re left wondering, “Is cryptocurrency taxation fair?” Significant gaps in the current state of cryptocurrency taxation are that it is taxed at a flat 30% rate without considering the effect of the classification of cryptocurrency and its impact on the similar treatment of mining and staking rewards. When it comes to making an efficient tax system, addressing such complex emerging issues becomes pertinent. Cryptocurrency taxation was introduced in India through the Finance Act, 2022, which introduced section 2(47) defining virtual digital assets, which include cryptocurrencies, where a flat 30% tax is applied on cryptocurrency (Virtual digital assets or VDAs) with 1% Tax deducted at source (TDS) for transactions exceeding 50,000 annually and 10,000 to specified persons, without being able to offset losses. This taxation poses significant challenges and stifles innovation in India. The major barrier to encouraging crypto transactions is the lack of classification and progressive tax on crypto and other digital currencies/assets. A question lies, can cryptocurrency and all digital assets be tried to fit into the existing heads of income, or does it require a sui-generis system tailored to their nature so as to ensure fairness in taxation?
Challenges of Classification
India does not follow progressive taxation when it comes to digital assets, which hinders the growth of investment and shifts such investors to more progressive tax havens like the UAE or Singapore. Under Section 56(2)(x)[1] of the Income Tax Act, VDAs are defined under ‘Property,’ yet there is a lacuna in addressing the different characteristics of each type of digital asset. A major drawback is the lack of differentiation in taxing long-term and short-term assets.
For example, Payment tokens such as Bitcoin are not considered legal tender in India. They are taxed under capital gains at a flat 30%. Coins like Bitcoin, XRP, and Litecoin all have their own blockchain and are given as rewards when mined. Whereas government-backed digital currencies like CBDCs are treated as legal tender, due to which they do not attract capital gains tax. Whereas Germany recognizes these payment tokens as capital gains and exempts tax on assets that are held for longer than one year. Further, Singapore does not tax such capital gains. This step by Germany and Singapore is significant as it encourages and incentivizes long-term crypto holders.
Another notable issue is the difference in treating Non-Fungible Tokens (NFTs) in India and across other jurisdictions. In India, NFT is considered a Virtual Digital Asset(VDA) and is expressly mentioned in the definition of VDA under the new act. However, countries like the US consider it as Intellectual property and tax it accordingly. NFTs are inherently different from other cryptocurrencies due to their nature. NFTs are non-fungible, which means they are unique and indivisible, and use blockchain to allot the ownership of such digital items. They are not interchangeable like cryptos, which affects their pricing and valuation; therefore, rules that apply to crypto may not necessarily work for NFTs.
Another major issue with cryptocurrency taxation is mining and staking rewards are being taxed in the same manner, i.e., at a flat 30% rate. Mining and Staking of cryptocurrencies are used to obtain validation and immutability of transactions within the blockchain. Mining, a process in which high powered computers are used to solve cryptographic puzzles to add a new block to the chain in return of rewards in form of tokens, is achieved through “proof of work,” and this mechanism needs high computational power. Staking is a process where users stake or lock up their coins as collateral as a proof of their vested interest in the network and receive rewards in exchange. Staking uses much less energy through its “proof of stake” mechanism to earn its rewards. Due to the usage of excess energy, mining is not done as a hobby but rather in groups for trading or as a business. This raises the issue of determining under which head of income they ought to be taxed. If it involves business activity, it must be taxed under Profits and Gains of Business and Profession (PGBP); however, currently it’s held as VDA, thereby attracting a flat tax rate. Moreover, its taxability is not clearly or specifically addressed in the current Act, leaving room for a lot of ambiguity.
Failure to address the problems arising from the classification of cryptocurrencies discourages individuals and entities from dealing with digital assets. The UAE and Singapore have no capital gains tax, and Germany excludes digital assets kept for more than a year from capital gains tax. Such incentivization becomes significant as long-term cryptocurrency holdings benefit the investors and the economy. It ensures stability, reduces volatility, increases sustainability, innovation, and economic growth.
The introduction of the new act brings some clarification to cryptocurrency taxation. VDAs, which are currently taxed under the income head of other sources, are amended. VDAs are considered as Property, thereby being taxed under the income head of capital gains. Gaps that were previously discussed are being remedied to a certain extent by treating cryptocurrency as property.
Cryptocurrencies are extremely volatile. Firstly, by treating it as property, long-term and short-term held cryptos are differentiated while taxing, which stabilizes the value while encouraging traders to hold their assets long-term. It contributes to a stable economy while encouraging investments in cryptocurrencies.
Secondly, treating assets under the same tax rule just because they are digital becomes unfair. This is done with NFTs by equating them to cryptocurrencies. According to the new tax act, treating NFTs as property is efficient and ensures correct taxation by accounting for the fair market value, holding of NFTs both long-term and short-term for their real worth. It also recognizes smart contracts, royalties, and sets off losses incurred.
Thirdly, gifting and inheritance of cryptocurrencies are not addressed in the current regime. In the new act, by treating VDAs as property, gift exemption and inheritance benefits will apply, filling the gap that currently exists. Further, the issues faced by miners and stakers (persons engaged in staking) while paying tax shall be resolved by the application of the treatment of cryptos as capital assets. The high cost incurred while mining can be deducted as acquisition cost, and the double taxation incurred in cases of staking is also avoided.
So what is the need for a Sui genres system?
Sui genres is a Latin word which means “of its own kind” and a sui genres system is a unique framework that governs a particular subject matter that cannot be fit into existing regulations. Considering digital assets as property, while simplifying taxation, does not tax them fairly under the existing legislation. The new tax act equates bitcoin to a house property, one being extremely volatile, intangible and traded across the globe, whereas the other is a stable, immovable, physical asset that is subject to well established valuation and legal frameworks. This ignores the fundamental difference in their nature, use, risk and valuation. In fact, when cryptocurrencies are classified into bitcoin, utility tokens, security tokens, and stablecoins, each has different functions.
Determining the Fair Market Value (FMV) of digital assets that change valuation every day is difficult for the purposes of taxation, leading to potential undervaluation or overvaluation of the asset. In mining and staking, the purchase price required as the cost of acquisition for the sake of taxation is not present, as they are not bought but are assigned or rewarded. In the case of CIT v. B.C. Srinivasa Setty, the Hon’ble Supreme Court held that capital gains tax under section 45 of the Income Tax Act can be levied only if the cost of acquisition of the asset is determinable. Applying this principle for the case of mining and staking, capital gains tax cannot be levied as its cost of acquisition cannot be determined due to its nature. Therefore, while taxing mined or staked rewards, considering them as property requires the determination of their cost of acquisition under the new tax act, which is not ascertainable.
The new Income Tax Act, 2025, added a new definition for VDAs under section 2(111)[2], though it solves a few issues by treating VDAs as property, to be taxed under the income head of capital assets, crypto taxation is not led by specific rules considering the classification of crypto. This calls for a sui-generis tax system tailored to VDAs and encourages investment in crypto and a longer holding period. Such an approach stabilizes the economy while encouraging innovation and decentralization.
Conclusion
Despite the structural changes made by treating VDAs as Property, there lie certain gaps that may contribute to instability within the crypto ecosystem. The new system may resolve interim issues, but it will likely prove problematic in a rapidly evolving economy. NFTs and tokenized securities, being inherently different in nature, are ignored and made to be taxed similarly to other digital assets, ignoring distinct use cases and economic behavior. Although reclassification of VDAs is beneficial, a sui generis system ensures fairness in taxation of digital assets.
[1] Income Tax Act as amended by Finance Act, 2025, §56(2)(x), p. 259
[2] Income Tax Act, 2025, § 2(111), p.10