Legal Narrative
Abstract
Cryptocurrency has moved from being a relatively unfamiliar technological concept to a subject of taxation, financial compliance and public policy in India. The Finance Act, 2022 introduced a specific tax framework for income arising from the transfer of Virtual Digital Assets (VDAs), including a 30 per cent tax under section 115BBH and a 1 per cent tax deduction mechanism under section 194S. This development brought virtual digital assets within the direct-tax framework, but taxation and regulation are not identical concepts. Subsequent measures, particularly the extension of anti-money-laundering obligations to VDA service providers and the introduction of crypto-asset transaction reporting provisions, have added further layers to the framework. This article examines the legal position emerging from these developments and considers the questions that remain concerning consumer protection, market supervision, enforcement and regulatory clarity.
INTRODUCTION
We often come across the word cryptocurrency in conversations that have little to do with traditional banking. A college student may discuss Bitcoin as an investment, someone may mention a crypto exchange on social media, while another person may simply wonder whether buying or selling a digital token is even legally permitted in India. This everyday uncertainty reflects a larger legal question: what exactly is the legal position of a virtual digital asset in India?
The question became particularly interesting in 2022. The Union Budget did not announce a general prohibition on cryptocurrencies. Instead, it proposed a specific tax regime for income arising from the transfer of Virtual Digital Assets (VDAs). The Finance Minister stated that the increasing magnitude and frequency of VDA transactions made a specific tax regime necessary. The proposal included taxation at 30 per cent, restrictions on deductions and loss set-off, and a 1 per cent tax deducted at source on payments relating to VDA transfers.¹
This created an unusual situation. On one hand, the law clearly addressed the tax consequences of transactions involving VDAs. On the other, taxation by itself does not answer every question about an asset. It does not automatically tell an investor what protections are available, which authority supervises an exchange, or what happens when a consumer loses money through fraud or the failure of a platform.
*The 2022 Tax Regime: A Significant Legal Shift*
The Finance Act, 2022 inserted section 115BBH into the Income-tax Act, 1961. Under the provision, income arising from the transfer of a VDA is taxed at 30 per cent, while
expenditure other than the cost of acquisition is not deductible and losses from VDA transfers cannot be set off against other income or carried forward.²
The Act also introduced section 194S, under which a 1 per cent TDS applies to consideration paid to a resident for transfer of a VDA, subject to specified conditions and thresholds.³
The definition itself is important. Section 2(47A) defines “virtual digital asset” broadly and covers specified cryptographically generated information, codes, numbers or tokens, NFTs and other notified digital assets. The definition has subsequently been expanded: from 1 April 2026, the law expressly includes a crypto-asset representing value that relies on a cryptographically secured distributed ledger or similar technology to validate and secure transactions.⁴
The 2022 regime therefore did something significant: it brought VDA transactions clearly into the tax administration framework.
But a tax provision has a limited purpose. It tells us how particular income is to be taxed. It does not, by itself, create a complete regulatory architecture for the entire activity.
*Taxation Is Not the Same as Regulation*
This is perhaps the central distinction that is something lags behind, let us understand through an example
Suppose a person buys cryptocurrency through an online platform. The Income-tax Act can determine the tax consequences when that asset is transferred. But other questions immediately arise.
What standards should the platform follow while handling customer assets? What information should it disclose to customers? What remedies should a customer have if the platform becomes inaccessible? Which authority should supervise the conduct of the intermediary? How should market manipulation or misleading advertisements be addressed?
These are regulatory questions, rather than merely tax questions.
India's experience before 2022 also shows why the legal position cannot be reduced to a simple “legal or illegal” description. In" Internet and Mobile Association of India v. Reserve Bank of India" ,the Supreme Court considered the RBI's 2018 circular restricting regulated entities from dealing with businesses connected with virtual currencies. The Court ultimately set aside the circular on proportionality grounds.⁵
The judgment did not create a comprehensive cryptocurrency regulatory framework. It instead became an important part of the judicial history surrounding the relationship between cryptocurrency-related activity and financial regulation.
*Regulation Did Not Stop with the 2022 Tax Measures*
It would, however, be inaccurate to say that nothing happened after the 2022 tax regime.
In March 2023, the Central Government brought specified activities relating to Virtual Digital Assets within the reporting framework under the Prevention of Money-Laundering Act, 2002. These activities included exchange between VDAs and fiat currencies, exchange
between different forms of VDAs, transfer of VDAs, safekeeping or administration of VDAs, and participation in financial services connected with the offer or sale of a VDA.⁶
The Financial Intelligence Unit-India subsequently required VDA service providers covered by the framework to register as reporting entities. The framework imposes anti-money laundering and counter-terrorist-financing responsibilities, including relevant KYC, customer due diligence and transaction-monitoring obligations.⁷
This development complicates the phrase “regulatory vacuum.”
There is clearly no complete absence of regulation. Instead, India has developed a sectoral and fragmented framework: taxation through income-tax law, anti-money-laundering obligations through the PMLA framework, and additional compliance mechanisms through other legal and administrative measures.
The more precise question, therefore, is whether these separate measures together provide the kind of comprehensive framework required for the rapidly developing VDA ecosystem.
*The Framework Continues to Evolve*
The regulatory story did not end in 2023.
The Finance Act, 2025 inserted section 285BAA into the Income-tax Act with effect from 1 April 2026. It creates an obligation for prescribed reporting entities relating to crypto-assets to furnish information concerning crypto-asset transactions. The provision also allows rules to prescribe the persons required to report, the information to be maintained and due diligence requirements concerning identification of crypto-asset users or owners.⁸
The Income-tax Department has also explained that the 2025 changes broadened the definition of crypto-assets and introduced transaction-reporting obligations.⁹
Thus, by 2026, the legal landscape is no longer the same as it was when the 2022 tax provisions were introduced.
*Where the Regulatory Gaps Remain*
Possible issues:
1.> investor/consumer protection;
2.>regulation of exchanges and intermediaries;
3.>custody of customer assets;
4.>fraud and cybercrime;
5.>coordination among different authorities.
Suggestions
*Create a clearer and unified regulatory framework.*
India should clearly define the responsibilities of the authorities dealing with VDAs and establish basic standards for exchanges and service providers. For an ordinary investor, the most important thing is not to understand every technical detail of blockchain, but to know who will protect their interests when something goes wrong. A simple and predictable framework can provide that confidence without unnecessarily restricting innovation.
*Strengthen consumer protection and grievance redressal.*
VDA users should have accessible mechanisms to report fraud, unauthorised transactions, misleading claims and problems with digital-asset platforms. Someone who loses money through a crypto platform should not be left wondering which authority to approach or whether any remedy is available. As digital assets become part of real financial lives, digital transactions also need real avenues for accountability.
Conclusion
India has moved beyond treating cryptocurrency as merely a technological experiment. The 2022 tax regime and subsequent compliance measures have brought VDAs into the legal framework, but important questions of investor protection, accountability and regulatory clarity remain.
The way forward is neither unquestioned acceptance nor blanket prohibition, but clear, proportionate and technology-sensitive regulation. After all, cryptocurrency may be digital, but the money and risks involved are very real. The law must ensure that innovation does not outpace protection.
Footnotes —
1. Union Budget 2022–23, Speech of Nirmala Sitharaman, ¶ 131 (Feb. 1, 2022).
2. Income Tax Act, 1961, § 115BBH (India).
3. Income Tax Act, 1961, § 194S (India).
4. Income Tax Act, 1961, § 2(47A) (as amended by Finance Act, 2025).
5. Internet & Mobile Ass'n of India v. Reserve Bank of India, (2020) 10 SCC 274.
6. Fin. Intelligence Unit-India, Registration of Virtual Digital Asset Service Providers in FIU-IND as Reporting Entity (July 4, 2023).
7. Fin. Intelligence Unit-India, AML & CFT Guidelines for Reporting Entities Providing Services Related to Virtual Digital Assets (Mar. 10, 2023).
8. Finance Act, 2025, § 90, inserting Income Tax Act, 1961, § 285BAA.
9. Income Tax Department, Key Highlights of Finance Act, 2025: Crypto Assets.
