Crypto & Virtual Digital Assets (VDA): The 2025 Guide to Set-Off Losses and TDS Filing

Let’s be painfully honest: being a crypto investor in India is not for the faint of heart.

It’s not just the volatile swings of Bitcoin or the nerve-wracking nature of altcoin seasons that keep you up at night. For Indian investors, the real anxiety often kicks in around tax season. Since the government introduced the stringent tax regime for Virtual Digital Assets (VDAs) in the Union Budget of 2022, navigating the compliance landscape has felt like walking through a minefield.

As we approach the Assessment Year 2025-26 (reflecting your financial activity from April 1, 2024, to March 31, 2025), the rules haven’t gotten any softer. In fact, the tax department’s scrutiny has only intensified through tools like the Annual Information Statement (AIS).

If you are holding, trading, or have transacted in crypto during FY 2024-25, ignorance is no longer bliss—it’s a potential penalty.

This guide is designed to cut through the legal jargon. We aren’t just regurgitating the Income Tax Act; we are going to look at the practical, often frustrating realities of Crypto & Virtual Digital Assets (VDA) taxation for 2025, with a hyper-focus on the two biggest pain points: the inability to set off losses and the complexities of TDS filing.

Understanding the Basics: The Virtal Digital Assets Landscape in 2025

Before diving into losses and TDS, we need to ensure we are speaking the same language as the Income Tax Department (ITD).

What exactly is a “Virtual Digital Assets”?

The Finance Act, 2022, introduced Section 2(47A) to define VDAs. It’s a broad definition crafted to catch almost everything in the Web3 space.

In simple terms, a VDA includes:

1. Cryptocurrencies: Any information, code, number, or token (not being Indian currency or foreign currency) generated through cryptographic means. This covers Bitcoin (BTC), Ethereum (ETH), Solana (SOL), USDT, and thousands of altcoins.
2. Non-Fungible Tokens (NFTs): Unique digital assets representing ownership of items like digital art, collectibles, etc.
3. Any other digital asset notified by the Central Government.

Crucial Note: The definition is broad by design. Whether you call it a “utility token,” a “governance token,” or a “memecoin,” if it holds value and is traded digitally, the taxman likely considers it a VDA.

The Core Tax Regime: Section 115BBH Explained

The foundation of crypto taxation in India lies in Section 115BBH. This is the section that dictates how your profits are taxed. For AY 2025-26, the rules remain unchanged, and they are notoriously rigid.

The Flat 30% Tax Rate (Plus Cess & Surcharge)

Any income from the transfer of a VDA is taxed at a flat rate of 30%.

When you add the 4% Health and Education Cess, the effective tax rate becomes 31.2%. If your total income places you in the high-net-worth bracket subject to surcharges, this rate can climb even higher.

This tax rate is applicable regardless of:

• Your income tax slab (even if you have zero other income, your crypto gains are taxed at 30%).
• The holding period (there is no concept of Long-Term vs. Short-Term capital gains in crypto; it’s all taxed the same).

The Calculation Formula and the “No Deduction” Rule

How do you calculate profit?

Taxable Profit = Selling Price (Transfer Value) – Cost of Acquisition

This seems straightforward until you read the fine print of Section 115BBH. The law explicitly states that no deduction is allowed in respect of any expenditure (other than the cost of acquisition) or allowance or set-off of any loss.

What this means for you in 2025:

• Exchange Fees are Not Deductible: The trading fees you paid to Binance, CoinDCX, or WazirX cannot be deducted as an expense.
• Gas Fees are a Grey Area: If gas fees are incurred during acquisition (e.g., minting an NFT or buying on a DEX), they might be considered part of the Cost of Acquisition. However, gas fees paid just to transfer assets between your own wallets are generally not deductible.
• Internet/Hardware Costs: You cannot deduct the cost of your mining rig, electricity bill, or internet connection against VDA gains.

The 2025 Guide to Set-Off Losses in Crypto (The Sting in the Tail)

This is perhaps the most contentious and painful aspect of Indian crypto taxation. It is where the “human” element of frustration really kicks in for investors who have experienced a bear market.

If you made a ₹5 Lakh profit on Bitcoin but lost ₹7 Lakh on Luna in the same year, common sense suggests you have a net loss of ₹2 Lakh and shouldn’t pay tax.

The Income Tax Department disagrees.

The Harsh Reality of Section 115BBH(2)(b)

The legislation specifically prohibits the set-off of losses. Let’s break down the different scenarios for AY 2025-26.

Scenario 1: Setting off Crypto Losses against Other Income Heads

Can you set off a loss from VDAs against your Salary income, Business income, or Stock Market gains?

Answer: No. This is explicitly forbidden. A VDA loss is quarantined. It cannot reduce your tax liability from any other source of income.

Scenario 2: Carry Forward of Losses to Future Years

If you have a net loss in Crypto in FY 2024-25, can you carry it forward to offset profits in FY 2025-26?

Answer: No. Unlike stock market losses (which can be carried forward for 8 years), crypto losses cannot be carried forward. If you have a loss year, that loss dies at the end of the financial year. It is a “dead loss.”

Scenario 3: The “Intra-Head” Set-Off Debate (Setting off losses against gains within the same year)

This is the most confusing part. Can you set off a loss from Ethereum against a gain from Bitcoin in the same financial year?

The wording of Section 115BBH says: “…no set off of any loss from transfer of the virtual digital asset computed under clause (a) of sub-section (1) shall be allowed against income computed under the said clause…”

The Restrictive Interpretation (The Taxman’s likely view): Many interpret this to mean that every single trade stands alone.

• Trade A (BTC): Profit ₹100 -> Taxable at 30%.
• Trade B (ETH): Loss ₹80 -> Loss is ignored.
• Total Taxable Income = ₹100.

The Liberal Interpretation (The Investor’s Hope): Some tax experts argue that “income from transfer of VDA” refers to the net income from the entire “basket” of VDA transactions for the year.

• Total VDA Gains for the year: ₹5,00,000
• Total VDA Losses for the year: ₹3,00,000
• Net Taxable VDA Income: ₹2,00,000

What should you do for AY 2025-26? While the liberal interpretation seems fairer, the FAQs initially released by the government (though not legally binding law) leaned towards the restrictive view—meaning no set-off even within the same year.

Until there is a clear judicial ruling or government clarification, the conservative approach is safer: assume you cannot set off losses from one coin against gains from another. Yes, this could lead to absurd situations where you have a net loss overall but still owe huge taxes on profitable individual trades.

Recommendation: Consult a Chartered Accountant specialized in crypto before finalizing your ITR if you are planning to use intra-head set-offs.

Navigating Crypto TDS Filing: Section 194S Explained

While Section 115BBH handles your final tax bill, Section 194S handles the transaction trail. It is a mechanism to ensure the government knows who is trading what.

194S mandates the deduction of Tax Deducted at Source (TDS) on VDA transactions.

The 1% TDS Rule: The Basics

• Rate: 1% TDS must be deducted on the total transaction value.
• Trigger: It applies when a resident buys a VDA. The buyer is responsible for deducting the tax from the seller’s payment and depositing it with the government.

Thresholds: Who needs to Deduct TDS?

This is where it gets tricky for individual investors. The threshold depends on whether you are considered a “Specified Person.”

Who is a “Specified Person”? Usually, this means an Individual or HUF whose accounts are not required to be audited under the Income Tax Act. (Generally, salaried employees or small business owners/freelancers with turnover below audit limits).

The Thresholds for FY 2024-25:

1. For Specified Persons (Most Retail Investors): TDS applies if the total value of VDA transactions with a single seller exceeds ₹50,000 in the financial year.
2. For Non-Specified Persons (Larger businesses/traders subject to audit): TDS applies if the threshold exceeds ₹10,000 in the financial year.

Practical TDS Scenarios for 2025

How does this work in the real world?

1. Trading on Compliant Indian Exchanges (e.g., CoinDCX, WazirX, CoinSwitch)

This is the easiest scenario. The exchange acts as an intermediary. When you sell crypto on an Indian exchange, the exchange automatically deducts the 1% TDS and deposits it against your PAN. You don’t have to do anything except download your TDS certificate (Form 16A) later.

2. Trading on International Exchanges (e.g., Binance, Coinbase)

If you are buying crypto on an international exchange using INR (via bank transfer, if allowed), the onus might fall on you, but usually, these exchanges don’t facilitate direct INR pairs easily anymore.

The bigger issue is Crypto-to-Crypto trading on these platforms (e.g., BTC/USDT pair). Technically, every crypto-to-crypto trade involves selling one asset and buying another, triggering TDS. International exchanges do not deduct this Indian TDS. This is a massive compliance gap that the Indian government is trying to close.

3. Peer-to-Peer (P2P) Transactions

This is the highest-risk area for the average user.

If you use Binance P2P or similar platforms to buy USDT using INR transferred directly to another person’s bank account:

• YOU are the buyer.
• If your transactions with that specific seller cross ₹50,000 in the year, YOU are legally required to deduct 1% of the INR amount, pay the seller the remaining 99%, and deposit that 1% to the Indian government using Form 26QE.

Most P2P users ignore this. The government is increasingly using bank account data to identify these transactions, leading to notices.

4. Decentralized Exchanges (DEXs) like Uniswap/PancakeSwap

When you swap ETH for a memecoin on a DEX, it’s a crypto-to-crypto trade. Technically, TDS applies. Practically, because there is no central intermediary and often no KYC, compliance is nearly impossible for the average user. However, the law still states it should be done.

A Step-by-Step Guide to TDS Filing for 2025 (Form 26QE)

If you find yourself in a P2P scenario where you need to deduct TDS as a “Specified Person,” here is how you do it. You do not need a TAN (Tax Deduction Account Number) for this; your PAN is enough.

The Deadline: TDS deducted must be deposited within 30 days from the end of the month in which the deduction was made. (e.g., if you bought P2P on July 15th, you must deposit TDS by August 30th).

Steps to File Form 26QE:

1. Login: Go to the Income Tax e-Filing portal.
2. Navigate: Go to e-File -> e-Pay Tax.
3. Select Form: Choose “New Payment” and look for the category related to TDS on VDA (often grouped under demand payment or specific TDS sections depending on portal updates). You are looking for Form 26QE (Challan-cum-statement).
4. Fill Details:
   • Your PAN (Buyer).
   • Seller’s PAN (This is crucial. In P2P, you must demand the seller’s PAN. If they don’t provide it, TDS rate shoots up to 20%).
   • Amount paid and TDS deducted.
5. Payment: Pay the TDS amount using net banking or UPI.
6. Certificate: Once processed, you must generate Form 16E and provide it to the seller as proof of deduction.

Consequences of Non-Compliance with TDS

Ignoring TDS is dangerous.

• Disallowance of Expense: If you don’t deduct TDS, 30% of the purchase cost might be disallowed as an expenditure when calculating your taxes (under Section 40(a)(ia)). This is disasterous.
• Interest & Penalty: You will be charged interest on late payment, plus penalties that can equal the amount of TDS you failed to deduct.

Preparing for AY 2025-26: Your Compliance Checklist

As we move through FY 24-25, preparing for the AY 25-26 filing season starts now.

1. Meticulous Record Keeping: Do not rely solely on exchanges to keep your data. Download trade history CSV files every month. Exchanges shut down; your liability doesn’t.
2. Use Crypto Tax Software: Given the complexity of calculating FIFO (First-In-First-Out) accounting across multiple wallets and exchanges, manual calculation is impossible. Use reputable Indian crypto tax software (like KoinX, TaxNodes, CoinTracker, etc.) to aggregate your data.
3. Reconcile with AIS/TIS: Log into your income tax portal and check your Annual Information Statement (AIS). Ensure the crypto transactions reported there match your own records. If TDS was deducted on your sales, ensure it reflects in your Form 26AS so you can claim the credit.
4. Stop Risky P2P: Unless you are willing to comply with Form 26QE strictly, avoid high-volume P2P transactions.

Conclusion

The 2025 outlook for crypto taxation in India remains challenging. The inability to set off losses under Section 115BBH feels punitive to many investors, and the TDS compliance burden under Section 194S is significant for those venturing outside compliant Indian exchanges.

While we all hope for regulatory easing in future budgets, hope is not a tax strategy. The best approach for AY 2025-26 is rigorous record-keeping, conservative interpretation of set-off rules, and strict adherence to TDS requirements.

Disclaimer: This article is for educational purposes only and does not constitute professional tax advice. Crypto taxation rules are complex and subject to interpretation. Always consult with a qualified Chartered Accountant before filing your returns.

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