INTRODUCTION
The digital economy has observed a rapid escalation in virtual digital assets (VDAs), such as cryptocurrencies and non-fungible tokens (NFTs). These digital assets are non-corporeal but have demonstrated a corporeal financial value and important economic implications worldwide. In India, the conversation about regulation, taxation, and classification of such assets has gained critical force in the past few years and peaked in legislative and financial interference. However, the legal treatment of VDAs is still shattered and controversial, which creates regulatory uncertainty for investors, exchanges, and policymakers. This uncertainty stems from the lack of a unified legal framework that can adequately define and govern the VDAs efficiently. The volatile nature of the crypto market and frequent scams and state borders have accelerated the need for clear legal intervention. This reflects the transitional phase in the Indian economy related to its development.
UNDERSTANDING VIRTUAL DIGITAL ASSETS (VDAS)
Virtual Digital Assets, defined under section 2(47A) of the Income Tax Act, 1961, include cryptocurrencies, NFTs, and other digitally generated tokens with an inherent value on digital platforms.[1]. These assets are neither physical materials nor traditional companies that the government can issue, but they can be traded, transferred, and invested. Cryptocurrencies like Bitcoin and Ethereum work on a blockchain technology, which provides a dispersed peer-to-peer transaction without relying on a central authority. NFTs, in contrast, are distinctive cryptographic assets that represent ownership of digital or real-world items such as artwork, music, or videos.
LEGAL STATUS OF CRYPTOCURRENCIES AND NFTS IN INDIA
In the current age of 2025, no legislation that can govern the use, trade, or legality of Cryptocurrencies and NFTs in India. In the 2018 circular, the Reserve Bank of India (RBI) banned regulated financial institutions that deal in virtual currencies[2]. The Supreme Court struck down this circular in Internet and Mobile Association of India v Reserve Bank of India[3]. The Supreme Court stated that the RBI’s measure was not proportional to the harm that needed to be prevented. Even after the Supreme Court’s interference, regulatory uncertainty was present until the Finance Act 2022 added provisions for the taxation of VDAs, completely recognizing their existence. The government remains cautious and expresses its concerns over money laundering, terror financing, tax evasion, and consumer protection risks associated with VDAs.
TAXATION FRAMEWORK FOR VIRTUAL ASSETS
A specific tax regime via the Finance Act 2022 was introduced to regulate VDAs, which was further refined through the Finance Act 2025. Section 115BBH of the Income Tax Act imposed a tax rate of 30% (excluding cess and surcharge) on the income derived from the transfer of VDAs[4]. No deduction was permitted in respect of any expenditure other than the acquisition cost.
Section 194S of the Act requires 1% tax deducted at source (TDS) on payments that are made for the transfer of VDAs exceeding an amount of INR 10,000 in a financial year.[5]. These provisions create accountability and monitor VDA transactions without a need for formal recognition as legal tender.
NFTs are a subset of VDAs and are subject to identical tax treatment. Despite this, challenges are faced in identifying the fair market value of NFTs, especially those that are linked to artwork or intellectual property.
REGULATORY CHALLENGES IN INDIA
Multiple regulatory challenges arise even after the taxation framework in the Indian ecosystem plagues VDA:
- Classification and legal: The main issue in organizing cryptocurrencies is what they are- currencies, commodities, securities, or something novel. Both the RBI and the government denied that Cryptocurrencies are being treated as legal tender[6]. Many jurisdictions globally treat digital assets as commodities (USA)[7] or payment tokens (Singapore)[8]. Delays in the enactment of India’s pending Cryptocurrency and Regulation of Official Digital Currency Bill have prolonged uncertainty in addressing this classification issue.
- Anti-Money Laundering and KYC Compliance: VDAs have a counterfeiting nature, which can be a potential tool for money laundering and terror funding. Several cryptocurrencies exchange was flagged for AML non-compliance by the Enforcement Directorate (ED) and Financial Intelligence Unit-India (FIU-IND)[9]. The government wants to impose Know Your Customer (KYC) and record-keeping under the Prevention of Money Laundering Act, 2002, for VDA intermediaries.
RECENT JUDICIAL AND POLICY DEVELOPMENTS
After the Supreme Court’s decision in 2020, Indian courts rarely adjudicate VDA disputes directly. However, the Gujarat High Court, in Gaurav Soni v State of Gujarat[10], acknowledged the growing need for regulatory oversight in crypto-based investment schemes and directed investigation agencies to probe criminality.
INTERNATIONAL APPROACHES:
Many jurisdictions have adopted regulatory frameworks for digital assets:
- USA: The Commodity Futures Trading Commission (CFTC) regulates cryptocurrencies as commodities, while the Securities and Exchange Commission (SEC) monitors initial coin offerings (ICOs) that qualify as securities[11].
- Singapore: Under the Payment Services Act, 2019, cryptocurrency exchange requires licenses and must comply with AML/KYC norms[12].
- European Union: The forthcoming Markets in Crypto-Assets (MiCA) regulation provides licensing, consumer protection, and reserve requirements for stablecoins and other VDAs[13].
THE ROAD AHEAD:
Regulatory approaches India can Consider:
- Making it compulsory to register crypto exchanges and gain an operational license, subject to minimal capital requirements, AML obligations, and consumer safeguards.
- Defining what exactly is VDA, whether a commodity, a security, or a hybrid, aligning with obligations.
- Making sure VDAs are under the Prevention of Money Laundering Act 2002, and implement KYC for wallet providers for reporting suspicious transactions, and maintain transactional records.
- Establishing grievance redressal forums and compulsory disclosure regarding investment risks.
- Formulating guidelines and IP norms for NFTs, especially linked to artworks and creative content[14].
CONCLUSION
In its legal framework, India is gradually evolving in the world of Virtual Digital Assets. Even though taxation laws have recognized cryptocurrencies and NFTs, comprehensive regulation on their classification, AML Compliance, and legal regulation is still absent. The government should balance between innovation and investment with financial security and legal accountability. Future regulations that can ensure the economic potential of VDAs while safeguarding national security and public interest should be clearly enacted.
Author(s) Name: Kirti Bansal (Karnataka State Law University/ ISBR Law College)
References:
[1] Income Tax Act, 1961, s 2(47A).
[2] Reserve Bank of India, Prohibition on Dealings in Virtual Currencies (Circular RBI/2017-18/154, DBR.No.BP.BC.104/08.13.102/2017-18, 6 April 2018)
<https://web.archive.org/web/20180408101222/https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11243&Mode=0 >accessed 25 April 2025.
[3] Internet and Mobile Association of India v Reserve Bank of India (2020) 10 SCC 229.
[4] Income Tax Act, 1961, s 115BBH, as amended by the Finance Act, 2025.
[5] Income Tax Act, 1961, s 194S.
[6] Reserve Bank of India, Statement on Developmental and Regulatory Policies (2018)
https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?head=Developmental%20and%20Regulatory%20Policies accessed 25 April 2025.
[7] Commodity Futures Trading Commission, CFTC Orders Bitcoin Options Trading Platform Operator and its CEO to Cease Illegally Offering Bitcoin Options and to Cease Operating a Facility for Trading or Processing of Swaps Without Registering (CFTC Release No 7231-15, 17 September 2015) https://www.cftc.gov/PressRoom/PressReleases/7231-15 accessed 25 April 2025.
[8] Monetary Authority of Singapore, Payment Services Act 2019 https://sso.agc.gov.sg/Act/PSA2019 accessed 25 April 2025.
[9] Cryptocurrency exchanges under ED scanner for money laundering violations’ The Economic Times (New Delhi, 5 August 2022) https://economictimes.indiatimes.com/industry/banking/finance/cryptocurrency-exchanges-under-ed-scanner-for-money-laundering-violations/articleshow/93386903.cms accessed 25 April 2025.
[10] Gaurav Soni v State of Gujarat (2023) Gujarat HC, Criminal Writ Petition No. 711 of 2023.
[11] Securities and Exchange Commission, ICO Regulation (2020) https://www.sec.gov/ICO accessed 25 April 2025.
[12] Monetary Authority of Singapore, Payment Services Act 2019, Singapore Statutes Online https://sso.agc.gov.sg/Act/PSA2019 accessed 25 April 2025.
[13] European Commission, Regulation of the European Parliament and of the Council on Markets in Crypto-assets, and amending Directive (EU) 2019/1937 (MiCA) COM/2020/593 final https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A52020PC0593 accessed 25 April 2025.
[14] FATF’s Guidance on Virtual Assets, the European Union’s MiCA Regulation, and India’s VDA consultations, see Financial Action Task Force (FATF), Guidance on Virtual Assets and VASP Regulation, available at https://www.fatf-gafi.org/publications/ accessed 25 April 2025.
