Budget 2026 should address VDA tax losses as crypto gains taxed at 30%: SAM Partner

The discourse surrounding the taxation of Virtual Digital Assets (VDAs), popularly known as cryptocurrencies, has been a dynamic and often contentious issue in India. As Budget 2026 approaches, the renewed calls from investors for tax relief, particularly the ability to set off losses against gains, highlight the evolving landscape of digital asset regulation and its economic implications for India. **Background Context and What Happened:** The journey of VDA regulation in India has been marked by caution and evolving policy. Initially, there was significant ambiguity, with the Reserve Bank of India (RBI) expressing strong reservations about private cryptocurrencies due to concerns over financial stability, money laundering, and their potential impact on monetary policy. In April 2018, the RBI issued a circular prohibiting regulated entities from dealing with or providing services to crypto-related businesses, which was later quashed by the Supreme Court in March 2020, citing a lack of legislative backing. This judgment opened the door for crypto trading to flourish, but without a clear regulatory framework. The turning point arrived with the Union Budget 2022-23, presented on February 1, 2022. Recognizing the growing volume of VDA transactions and the need for a taxation mechanism, the government introduced a comprehensive tax regime through the Finance Act, 2022. This legislation defined VDAs and stipulated that any income from the transfer of VDAs would be taxed at a flat rate of 30% without any deduction for expenses (other than the cost of acquisition). Crucially, it disallowed the set-off of losses incurred from the transfer of VDAs against any other income, and carrying forward such losses to subsequent assessment years was also prohibited. Furthermore, a 1% Tax Deducted at Source (TDS) was introduced on payments made in relation to the transfer of VDAs exceeding certain thresholds, effective from July 1, 2022. The government's stated rationale was to bring these transactions into the tax net, discourage speculative trading, and gather data, without necessarily legitimizing them as legal tender. **Key Stakeholders Involved:** Several key stakeholders are impacted by and influence this policy. **VDA investors**, both domestic and foreign, are at the forefront, grappling with the high tax rate and the inability to claim losses, which they argue is unfair and deters legitimate investment. **VDA exchanges and platforms** also face compliance burdens and see their business growth potentially hampered by stringent tax rules. The **Government of India**, primarily the Ministry of Finance and the Central Board of Direct Taxes (CBDT), is responsible for revenue collection, maintaining financial stability, and preventing illicit financial activities. The **Reserve Bank of India (RBI)** continues to advocate for a cautious approach, preferring a Central Bank Digital Currency (CBDC) over private cryptocurrencies. Internationally, bodies like the **Financial Action Task Force (FATF)** and the **G20** play a crucial role in shaping global VDA regulatory standards, which India, as a member, is keen to align with. **Why This Matters for India:** This issue holds significant implications for India. Economically, the current tax regime could potentially stifle innovation in the burgeoning Web3 space and lead to capital flight, as investors might seek more favorable tax environments. It also impacts government revenue, as a balanced approach could encourage compliance and broader participation. Politically, it reflects the government's stance on emerging technologies and its commitment to a robust, yet progressive, regulatory framework. Socially, clearer regulations could protect retail investors from volatile markets and fraudulent schemes. India's leadership in the G20 during 2023 saw it champion global discussions on a coordinated regulatory framework for crypto assets, underscoring its commitment to shaping international policy on this front. **Historical Context and Future Implications:** Historically, the Indian government's approach has evolved from an almost outright ban to a taxation-first strategy. The current debate around Budget 2026 signals a potential shift towards refining these tax policies. The demand for allowing loss set-off is a common feature in taxation of other asset classes like equities and mutual funds, and its absence for VDAs is a major point of contention. Future implications include the possibility of a more nuanced tax structure, potentially allowing for loss set-off, or even a tiered tax rate, to foster a more conducive environment for VDA innovation and investment. The ongoing transition to a new Income Tax Act also presents an opportunity for a comprehensive overhaul of VDA taxation, integrating it more seamlessly into the broader tax framework. India's continued engagement with global partners, particularly through forums like the G20, will likely influence its domestic policy, aiming for harmonization while addressing unique national concerns. **Related Constitutional Articles, Acts, or Policies:** * **Finance Act, 2022**: This is the primary legislation that introduced the 30% tax on VDA gains and 1% TDS, along with the disallowance of loss set-off. * **Income Tax Act, 1961**: This overarching act governs income taxation in India, and the VDA provisions are amendments to it. * **Article 265 of the Indian Constitution**: States that "No tax shall be levied or collected except by authority of law." This underscores the need for legislative backing for any taxation, as provided by the Finance Act, 2022. * **Seventh Schedule of the Constitution (List I, Entry 82)**: Grants the Union Parliament the power to legislate on "Taxes on income other than agricultural income," which is the basis for the central government's authority to tax VDAs. * **Prevention of Money Laundering Act (PMLA), 2002**: In March 2023, the Ministry of Finance brought VDAs under the purview of PMLA, making VDA exchanges and intermediaries 'reporting entities' to combat money laundering and terror financing. This reflects a broader regulatory push beyond just taxation. * **FATF Recommendations**: India, as a member of FATF, is committed to implementing global standards for anti-money laundering and combating the financing of terrorism (AML/CFT), which now explicitly cover VDAs.