Income Tax on Bitcoin: Will Budget 2025 raise tax on Bitcoin ETFs from 12.5% to a flat 30%? 

Ahead of the Union Budget 2025, advocates within India's cryptocurrency and blockchain landscape are urging for substantial reforms to promote innovation, expansion, and global competitiveness. On Tuesday, Bitcoin (BTC) bounced back above $100,000, signaling a recovery from the recent downturn triggered by the selloff initiated by Chinese AI startup DeepSeek.

The year 2024 saw a series of ups and downs for the Indian crypto community. While crypto adoption saw a significant increase, many Indian investors faced losses following a major setback at the WazirX cryptocurrency exchange.

Cryptocurrencies and NFTs are categorised as Virtual Digital Assets, and Section 2(47A) was added to the Income Tax Act to define this term. VDAs mean all types of crypto assets, including NFTs, tokens, and cryptocurrencies, but they will not include gift cards or vouchers.

At present, cryptocurrencies and NFTs in India remain unregulated, with a high 30% tax on capital gains and an additional 1% tax deducted at source (TDS).

Deductions other than the cost of acquisition are not permitted when reporting income from the transfer of digital assets. Losses from digital assets cannot be offset against any other income. Tax will be applicable to receivers of gifted digital assets. Losses from one virtual currency cannot be offset against income from another digital currency.

Income tax on Bitcoin ETFs

When an individual from India invests in Bitcoin ETFs in the US market, a significant tax question arises. The issue at hand is whether the capital gains obtained from the sale of Bitcoin ETFs should fall under the purview of Sections 115BBH, 50AA, or 112 of the Indian Income Tax Act, 1961. The recent Budget 2022 introduced Section 115BBH, which subjects profits from the sale of Virtual Digital Assets (VDA), including cryptocurrencies like Bitcoin, to taxation.

Section 115BBH: Income received from the sale of virtual digital assets is subject to taxation as per Section 115BBH, with a fixed tax rate of 30%. A virtual digital asset encompasses cryptocurrencies, NFTs, and other digital assets as specified. It is important to note that Bitcoin ETF units may not fall under the protection of VDA as investors do not directly invest in the cryptocurrency. Instead, Asset Management Companies (AMCs) may be subjected to taxation under this rule. In cases where USA AMCs are not taxed in India, investors are not obligated to pay tax under Section 115BBH.

However, if Bitcoin Spot ETF is categorized as a VDA in the specified third category, any resulting profits may be taxed under this provision. It is essential to monitor any changes in classification to determine the applicability of this provision.

Furthermore, Section 50AA was introduced in the Budget 2023 to tax income from specific mutual funds that do not allocate more than 35% of their total proceeds towards equity shares of domestic companies. The coverage of this tax provision was broadened in the Budget 2024 to encompass income from designated mutual funds that invest over 65% of their total proceeds in debt-based securities, such as debt and money market instruments.

Section 112 acts as a catch-all provision for the taxation of long-term capital gains on capital assets not addressed by specific provisions. It stipulates that short-term capital gains on assets not covered by Section 111A, such as listed equity shares, are subject to taxation at the prevailing tax rate.

Current income taxes on Bitcoins ETFs

According to existing income tax legislation, profits from the sale of Bitcoin ETFs held for the long term are expected to be subject to taxation under Section 112 of the Income Tax Act. This means that long-term capital gains would be taxed at a rate of 12.5%. Additionally, short-term capital gains will be taxed based on the taxpayer's income bracket.

The government introduced Section 115BBH in the Budget of 2022 with the aim of discouraging Indian investors from participating in Bitcoin and other cryptocurrencies.

Therefore, it is essential for the government to provide clarity in this year's Budget regarding the correct interpretation of the provision.

Specifically, clarification is needed on whether long-term capital gains on Bitcoin ETFs should indeed be taxed under Section 112 at a reduced rate of 12.5%, or if the gains should be taxed at a flat rate of 30%, similar to gains from the sale of bitcoins and other digital currencies.

Top expectations

Avinash Shekhar, Co-Founder & CEO, Pi42, said: "High taxation on virtual digital assets is causing Indian investors to miss out on global crypto opportunities. Lowering taxes below 30% and reducing TDS from 1% to 0.01% could stimulate financial growth, boost compliance, and retain investors. Reforms like allowing the set-off and carry-forward of losses are essential to level the playing field and position India as a leader in the Web3 and blockchain revolution."

“They must provide a clear regulatory framework for blockchain and cryptocurrencies, encourage blockchain adoption in land records, supply chain management, and public services and set up Web3 incubators for startups,” said Gaurav Sahay, Practice Head – Technology & General Corporate, Fox Mandal & Associates LLP.

Nikhil Sethi, Founder & MD, Zuvomo, said: “Ambiguity in crypto compliance and a regressive tax regime have hindered innovation, pushing startups and talent overseas. The RBI's stance reflects a lack of understanding of decentralisation's intrinsic nature—it cannot be banned, only regulated. Meanwhile, nations like the U.S., Singapore, Russia, South Korea, and the UAE are embracing progressive policies to foster crypto innovation.”

Raj Karkara, COO, ZebPay, said: “It is pivotal for India to align its crypto policies with the global regulatory framework to fully harness the industry’s potential. We are hoping that the Union Budget 2025 will introduce progressive measures such as revisiting the 30% tax on crypto income and the 1% TDS mechanism,” 

He added: “Recognition of crypto as a formal asset class, with clear classifications is another critical step. This clarity, coupled with robust regulatory guidelines, will not only safeguard investors but also provide a stable foundation for the industry’s growth.” 

"The Virtual Digital Asset (VDA) sector holds immense potential for India’s digital economy, but existing tax policies hinder its growth. We recommend reducing the TDS on VDA transactions from 1% to 0.01% and raising the threshold to Rs 5,00,000, which would ease the tax burden on smaller investors," said Ashish Singhal, Co-founder, CoinSwitch.