A SaaS company in Bengaluru parked ₹40 lakh of idle treasury in Bitcoin and Ethereum in FY 2024-25. Bitcoin gained ₹12 lakh. Ethereum lost ₹5 lakh. The founder told his accountant to book a net gain of ₹7 lakh and pay 30% on that. The accountant, unfortunately, agreed. When the return was picked up for scrutiny, the Assessing Officer disallowed the set-off entirely, taxed the full ₹12 lakh gain at 30% plus surcharge and cess, and added interest under Sections 234B and 234C for short-paid advance tax. The ₹5 lakh Ethereum loss simply vanished — it could not be set off, and it could not be carried forward.
This is the single most expensive misunderstanding companies have about Virtual Digital Asset taxation in India. Section 115BBH is not a normal head of income. It is a walled garden with one entrance and no exit.
What the law actually requires
Section 115BBH, Income Tax Act 1961 (inserted by the Finance Act 2022, effective 1 April 2022) taxes income from the transfer of any Virtual Digital Asset at a flat 30%, plus applicable surcharge and 4% health and education cess. For a domestic company with income above ₹10 crore, the effective rate reaches approximately 34.94%.
Three restrictions in the section do the real damage:
Section 115BBH(1)(b) permits only the cost of acquisition as a deduction. Nothing else. Not exchange trading fees, not gas fees, not custody charges, not the salary of the finance person tracking the wallet, not interest on borrowed funds used to acquire the asset. Section 115BBH(2)(a) explicitly overrides every other provision of the Act that would otherwise allow a deduction.
Section 115BBH(2)(b) prohibits set-off of a loss from VDA transfer against income under any other head — and, per the CBDT clarification and the Finance Act 2022 memorandum, against income from any other VDA as well. Loss on Ethereum cannot reduce gain on Bitcoin in the same year.
No carry-forward. Section 115BBH(2)(b) also bars carrying the loss forward to subsequent assessment years. A VDA loss is a permanent, non-recoverable event for tax purposes.
Section 2(47A) defines Virtual Digital Asset broadly: any information, code, number or token (not being Indian or foreign currency) generated through cryptographic means, providing a digital representation of value; any non-fungible token; and any other digital asset the Central Government notifies. This captures cryptocurrencies, NFTs, and most tokenised instruments. It does not capture gift cards, mileage points, or subscription vouchers, which were carved out by CBDT Notification No. 74/2022 dated 30 June 2022.
Section 194S requires the payer to deduct 1% TDS on the consideration for transfer of a VDA. For a company, the threshold is ₹10,000 in a financial year — the higher ₹50,000 threshold applies only to specified persons (individuals and HUFs below the Section 44AB audit limits). A Private Limited company is never a specified person. Every transfer above ₹10,000 aggregate in the year attracts TDS from the first rupee.
Where the transaction is on an Indian exchange, the exchange deducts and deposits under CBDT Circular No. 13/2022 dated 22 June 2022. Where the transaction is peer-to-peer, on a foreign exchange, or against another VDA (a crypto-to-crypto swap), the company itself is the deductor and must deposit under Section 194S and report in Form 26QE (challan-cum-statement, due within 30 days from the end of the month of deduction) or in the regular Form 26Q where the company holds a TAN and deducts in the ordinary course.
Schedule VDA in ITR-6 requires transaction-level reporting: date of acquisition, date of transfer, cost of acquisition, and consideration received, for each transfer. Aggregated reporting is a defect under Section 139(9).
Practical implications
The gross-up effect. Because only acquisition cost is deductible, a company that trades actively pays tax on a figure materially higher than its economic profit. A company that bought ₹1 crore of a token, paid ₹1 lakh in exchange fees, and sold for ₹1.2 crore has an economic gain of ₹19 lakh but a taxable gain of ₹20 lakh. At 30% plus surcharge and cess, roughly ₹6.99 lakh of tax on a ₹19 lakh gain — an effective rate of 36.8% on real profit.
Advance tax exposure. VDA income is not exempt from advance tax. A company that realises a large gain in Q3 and does not revise its advance tax instalment under the Section 211 schedule faces interest at 1% per month under Section 234C for the shortfall in that instalment and 1% per month under Section 234B on the aggregate shortfall from 1 April of the assessment year until payment.
TDS default is the more common failure. Failure to deduct under Section 194S attracts interest at 1% per month from the date deductible to the date deducted (Section 201(1A)(i)), and 1.5% per month from date of deduction to date of deposit (Section 201(1A)(ii)). Failure to file the TDS statement attracts ₹200 per day under Section 234E, capped at the TDS amount. Late or incorrect statements attract a penalty from ₹10,000 to ₹1,00,000 under Section 271H. And under Section 40(a)(ia), 30% of the corresponding expenditure is disallowed where TDS was deductible and not deducted — though for VDA the deduction is already denied by Section 115BBH, so this bites mainly on related payments.
The audit trail problem. Under Section 271AAD, a false entry or an omitted entry in the books attracts a penalty equal to the amount of the false or omitted entry. A company holding VDA in a wallet with no reconciled transaction ledger is exposed here. VDA holdings must also be disclosed as assets in the balance sheet under Schedule III, Division I/II of the Companies Act 2013, and the auditor's Section 143(3) report will comment on the valuation basis.
MCA21 v3 angle. MCA21 v3 auto-parses AOC-4 XBRL financial data. A material "Other Current Assets" or "Other Investments" balance with no corresponding note, or a sharp year-on-year swing in other income without an explanatory note, is precisely the kind of anomaly that raises an inspection flag. Where a company has taken VDA on its balance sheet, the notes to accounts must carry an explicit accounting policy — most Indian companies apply Ind AS 38 (intangible assets) or Ind AS 2 (inventory, where held for sale in the ordinary course), and the ICAI has not issued a mandatory VDA standard. State the basis.
Step-by-step: what to do
- Build a transaction-level ledger before anything else. One row per acquisition and per transfer: date, asset, quantity, INR consideration, wallet or exchange, counterparty, transaction hash. Schedule VDA cannot be filled from a year-end balance. Export from every exchange used, monthly, and reconcile to wallet balances.
- Apply FIFO for cost of acquisition, and document the choice. The Act does not prescribe a method, but CBDT's FAQ position and settled practice for fungible assets is first-in-first-out. Whichever method you adopt, apply it consistently across all assets and all years and record the policy in a board note.
- Identify every transaction where the company is the deductor. Indian exchange trades: the exchange deducts. Everything else — P2P, foreign exchange, crypto-to-crypto swap, payment to a vendor in VDA — the company deducts 1% under Section 194S. For crypto-to-crypto swaps both legs are transfers, and TDS applies on both.
- Deposit TDS and file the statement on time. With a TAN, report in Form 26Q by the quarterly due date (31 July, 31 October, 31 January, 31 May). Without a TAN for these transactions, use Form 26QE within 30 days from the end of the month of deduction. Issue Form 16E to the deductee within 15 days of filing Form 26QE.
- Recompute advance tax the same month a gain is realised. Do not wait for the year-end close. Revise the instalment under the Section 211 schedule (15% by 15 June, 45% by 15 September, 75% by 15 December, 100% by 15 March) to include the VDA gain, computed on the gross gain with no loss offset.
- Compute the tax asset-by-asset and transaction-by-transaction — never net. Total all gains. Ignore all losses. Apply 30% plus surcharge and cess to the gain figure alone.
- Disclose in the financial statements. Balance sheet line item, accounting policy note stating the standard applied and the valuation basis, and a note on custody arrangements. Brief the statutory auditor early — the valuation of an illiquid token is a live audit issue and a late surprise leads to a qualified opinion.
- File ITR-6 with Schedule VDA fully populated by 31 October (or 30 November where Form 3CEB applies). Where the transfer is to a related party or a foreign associated enterprise, check Section 92E applicability separately.
FAQ
Can a company set off a VDA loss against its business profits?
No. Section 115BBH(2)(b) bars set-off against any other head of income, and the loss cannot be carried forward. The loss is permanently lost for tax purposes even though it is a real economic loss in the books.
Is a crypto-to-crypto swap taxable if no rupees changed hands?
Yes. A swap is a transfer of the outgoing VDA. The gain is computed with reference to the fair market value of the consideration received in INR terms on the transfer date, and 1% TDS under Section 194S applies to both legs.
Are exchange fees and gas fees deductible?
No. Section 115BBH(1)(b) allows only the cost of acquisition. Every other cost — trading fees, gas, custody, advisory, borrowing cost — is disallowed, and Section 115BBH(2)(a) overrides other provisions that would otherwise allow them.
Does the ₹50,000 TDS threshold apply to a Private Limited company?
No. The ₹50,000 threshold applies only to specified persons — individuals and HUFs below the Section 44AB thresholds. For a company, the Section 194S threshold is ₹10,000 in the financial year, and once crossed, TDS applies to the transactions.
Closing
VDA taxation is one of the few areas where the arithmetic that feels correct is the arithmetic that triggers a demand notice. Net the gains against the losses and you have understated income. Deduct the trading fees and you have understated income. Wait until the year-end close to look at advance tax and you have bought yourself interest under two separate sections. The fix is not complicated — it is a transaction-level ledger, a documented cost method, and a monthly advance-tax recomputation — but it has to exist before the return is filed, not after the notice arrives.
For a compliance audit of your company, visit pvtltd.co
Ready to incorporate or sort your compliance?
Our team handles every filing. You focus on building.