Published 9 May 2026
Expenses Allowed and Disallowed -- why section 115BBH of the Income-tax Act, 1961 leaves the trader with cost of acquisition and nothing else
If a Futures and Options trader and a cryptocurrency trader walk into a Chartered Accountant's office on the same morning, both with comparable profits, they will leave with very different tax bills -- and very different P&L statements. The Futures and Options trader, taxed under the head Profits and Gains of Business or Profession, can deduct brokerage, software subscriptions, salary, rent, professional fees, depreciation and a long list of overheads under section 37(1) of the Income-tax Act, 1961. The cryptocurrency trader, taxed under section 115BBH of the Income-tax Act, 1961, can deduct only one thing -- the cost of acquisition. Everything else is disallowed by statute. This article walks through that uncompromising regime and explains, line by line, what the Virtual Digital Asset trader can claim and what must be left out.
Section 115BBH was introduced by the Finance Act, 2022 with effect from Assessment Year 2023-24. The Finance Act, 2024 (No. 2 of 2024) and the Finance Act, 2025 left the regime unchanged. The Income-tax Act, 2025, applicable from Tax Year 2026-27, carries forward the same scheme in its corresponding provision. The position therefore stands clear: the Virtual Digital Asset trader is governed by a special charging section that overrides the normal computational machinery.
1. The Section 115BBH Charging Scheme
Section 115BBH(1) of the Income-tax Act, 1961 charges income from the transfer of any Virtual Digital Asset to tax at the flat rate of 30%, plus applicable surcharge and the 4% Health and Education Cess. This rate is non-negotiable -- the slab rates do not apply, the section 115BAC concessional regime does not apply, and the section 87A rebate does not apply against this 30% charge. Section 115BBH(2) then layers on the three deduction prohibitions that define the entire regime.
Provision | Effect | Practical Consequence |
|---|---|---|
Section 115BBH(1) | Flat 30% tax on income from transfer of Virtual Digital Asset; surcharge and cess additional | Even a trader in the 5% bracket pays 30% on Virtual Digital Asset gains -- the regime is regressive |
Section 115BBH(2)(a) | No deduction in respect of any expenditure (other than cost of acquisition) or allowance or set off of any loss shall be allowed to the assessee in computing the income from transfer of such Virtual Digital Asset | Only cost of acquisition deductible. No mining cost, no electricity, no software, no professional fees, no exchange fees, no transaction charges |
Section 115BBH(2)(b) | No set off of loss from transfer of any Virtual Digital Asset against income computed under any other provision; no carry forward of such loss to the following assessment year | A loss on Bitcoin cannot be set off against a profit on Ethereum in the same year; a loss in any year cannot be carried forward at all |
Section 194S | 1% Tax Deducted at Source on consideration paid for transfer of Virtual Digital Asset, deducted by the buyer or by the exchange acting as deductor | Cumulative threshold of rupees ten thousand (rupees fifty thousand for specified persons) per financial year per buyer-seller pair |
The architectural point Section 115BBH is a self-contained, sealed-off charging scheme. Once income falls inside it, the entire deduction machinery of Chapter IV-D (Profits and Gains of Business or Profession) and Chapter IV-E (Capital Gains) is shut out. The trader cannot escape the 30% rate, cannot deduct overheads, cannot set off losses across coins, and cannot carry losses forward. The only computational input is cost of acquisition. |
2. What is a Virtual Digital Asset
Clause (47A) of section 2 of the Income-tax Act, 1961, also inserted by the Finance Act, 2022, defines a Virtual Digital Asset in three limbs. Limb (a) covers any information, code, number or token (not being Indian or foreign currency) generated through cryptographic means or otherwise, providing a digital representation of value, exchanged with or without consideration, with the promise or representation of having inherent value, or functioning as a store of value or a unit of account. Limb (b) covers a Non-Fungible Token. Limb (c) gives the Central Government a residual notification power to include other digital assets and to exclude specified ones.
Asset Type | Within Section 2(47A)? | Tax Treatment |
|---|---|---|
Bitcoin, Ethereum, Solana, Polygon, Cardano and similar cryptocurrencies | Yes -- limb (a) | Section 115BBH at 30% |
Stablecoins (USDT, USDC, DAI) | Yes -- limb (a) | Section 115BBH at 30% |
Non-Fungible Tokens (NFT) -- art, gaming, music, collectibles | Yes -- limb (b) | Section 115BBH at 30% |
Tokens received through airdrops or hard forks | Yes -- limb (a) at fair market value on the date of receipt; section 56(2)(x) may also apply if received without consideration | Receipt taxed under the head Other Sources or Salaries; subsequent transfer under section 115BBH |
Cryptocurrency received as payment for goods or services | Yes for the recipient on subsequent transfer | Receipt is business income at fair value; subsequent sale falls under section 115BBH |
Mining rewards | Yes -- limb (a) at fair market value on the date of mining | Receipt taxable under the head Other Sources at slab rate; subsequent transfer under section 115BBH |
Indian rupee, foreign currency, gift cards | No -- expressly excluded by the parenthetical exclusion in limb (a) | Outside section 115BBH |
3. Cost of Acquisition -- the Only Permitted Deduction
The proviso to clause (a) of sub-section (2) of section 115BBH permits the cost of acquisition to be deducted from the consideration on transfer. The Central Board of Direct Taxes Circular No. 13 of 2022 dated 22 June 2022 and the answers issued in the Frequently Asked Questions of 28 June 2022 spell out what does and what does not enter cost of acquisition.
Item | Does it enter cost of acquisition? | Reason |
|---|---|---|
Purchase price of the coin / token paid to the exchange or counterparty | Yes | Direct cost of acquiring the asset |
Goods and Services Tax paid on the exchange's brokerage component (where charged) | Yes -- forms part of acquisition price | Inseparable from the cost of buying |
Brokerage / exchange transaction fee on purchase | Disputed -- conservative view: NO; aggressive view: YES if forms part of purchase invoice | Central Board of Direct Taxes Frequently Asked Question 5 says 'no infrastructure cost' is deductible; many practitioners therefore exclude broker fees |
Brokerage / exchange transaction fee on sale | No | Expressly disallowed -- it is an expenditure on transfer, not a cost of acquisition |
Network fee / gas fee on the blockchain (Ethereum gas, Bitcoin miner fee) | No | Treated as infrastructure / transaction cost, expressly disallowed |
Cost of mining infrastructure (mining rig, electricity, internet, cooling) | No | Central Board of Direct Taxes Frequently Asked Question 5 expressly excludes infrastructure cost |
Subsequent expenditure to enhance the asset (staking improvements, custodial fees) | No | Section 115BBH(2)(a) bars all expenditure other than cost of acquisition |
For mining rewards and airdrops -- fair market value on date of receipt | Yes (this becomes the cost of acquisition for the subsequent transfer; the receipt itself is taxed separately) | Avoids double taxation on the same value |
First-In-First-Out method Where a trader holds multiple lots of the same coin acquired at different prices, the Central Board of Direct Taxes Frequently Asked Questions of 28 June 2022 require the First-In-First-Out method to be applied per wallet. Average cost or specific identification methods are not accepted by the Department. Maintain a wallet-wise lot ledger. |
4. Expenses Allowed -- The Very Short List
Against the consideration on transfer of a Virtual Digital Asset, the following items can be deducted in computing the gain charged to tax under section 115BBH. The list is exhaustive.
Allowed Item | Statutory Basis | Documentation |
|---|---|---|
Cost of acquisition of the specific Virtual Digital Asset transferred (purchase invoice from the exchange or counterparty) | Proviso to section 115BBH(2)(a) | Exchange-issued contract note, bank statement, wallet transaction history |
Where the Virtual Digital Asset was received through mining or airdrop, the fair market value on the date of receipt (which has already been taxed at the time of receipt) | Proviso to section 115BBH(2)(a) read with Central Board of Direct Taxes Frequently Asked Questions of 28 June 2022 | Date-stamped wallet entry, exchange rate snapshot, valuation memo |
For Non-Fungible Tokens, the rupee equivalent of the cryptocurrency paid on minting or buying the Non-Fungible Token | Proviso to section 115BBH(2)(a) | Mint invoice, blockchain explorer link, exchange rate at the time of minting |
5. Expenses Disallowed -- The Long List
Section 115BBH(2)(a) of the Income-tax Act, 1961 disallows in entirety every category of expenditure other than the narrow cost of acquisition discussed above. The following table catalogues the items that the trader must keep out of the section 115BBH computation -- and that includes items that would unquestionably be allowed if the same trader were operating in the Profits and Gains of Business or Profession regime.
Disallowed Item | Why Disallowed | Practitioner Note |
|---|---|---|
Brokerage / transaction fees paid to the cryptocurrency exchange on sale | Section 115BBH(2)(a) -- not cost of acquisition; expenditure on transfer is not a permitted deduction | Even though the contract note shows a clear deduction by the exchange, the gross consideration is taxed |
Goods and Services Tax on exchange brokerage (sale leg) | Same as above | No input tax credit available either, since securities-like assets are outside the Goods and Services Tax credit chain |
Network fees / blockchain gas fees / miner fees | Section 115BBH(2)(a) -- infrastructure / transaction cost | Significant for Ethereum traders during peak congestion; entire fee non-deductible |
Cost of mining hardware, graphics processing units, application-specific integrated circuit miners | Section 115BBH(2)(a) -- expressly identified as infrastructure cost in Central Board of Direct Taxes Frequently Asked Question 5 | Capitalise in books, but cannot reduce section 115BBH income; depreciation in books is for accounting purposes only |
Electricity, internet, cooling, hosting and bandwidth charges for mining or trading operations | Section 115BBH(2)(a) -- infrastructure / overhead cost | Even where mining is the only business, these costs find no shelter in the section 115BBH computation |
Cryptocurrency wallet software, hardware wallet (Ledger, Trezor), cold storage cost | Section 115BBH(2)(a) -- infrastructure | Treat as personal effect for accounting; no tax deduction |
Subscription to charting / portfolio / tax-tracking platforms (CoinTracker, Koinly, ZenLedger, CoinDCX TaxBoard) | Section 115BBH(2)(a) -- service cost | Even Indian rupee paid for compliance software is not deductible |
Professional fees paid to a Chartered Accountant for preparation of the Virtual Digital Asset return / Schedule VDA | Section 115BBH(2)(a) -- service cost | Allowable only against other heads of income if the assessee has other taxable income; cannot reduce Virtual Digital Asset gain |
Salary, rent, office overheads attributable to the Virtual Digital Asset business | Section 115BBH(2)(a) -- expenditure other than cost of acquisition | Even if the trader runs a full Virtual Digital Asset desk, overheads cannot be set against section 115BBH income |
Interest on borrowed capital used to fund Virtual Digital Asset purchases | Section 115BBH(2)(a) -- not cost of acquisition | Reflects the regime's deliberate disincentive to leveraged Virtual Digital Asset trading |
Loss on transfer of one Virtual Digital Asset against gain on another Virtual Digital Asset in the same year | Section 115BBH(2)(b) -- inter-Virtual-Digital-Asset set-off prohibited (this is the position taken by the Central Board of Direct Taxes Circular No. 13 of 2022) | A rupees five lakh loss on Bitcoin and a rupees seven lakh gain on Ethereum is taxed on the rupees seven lakh gain; the rupees five lakh loss simply lapses |
Loss from any Virtual Digital Asset against any other head of income (Salary, House Property, Profits and Gains of Business or Profession, Capital Gains, Other Sources) | Section 115BBH(2)(b) -- inter-head set-off prohibited | The 30% Virtual Digital Asset regime is a one-way street -- gains pay tax, losses lapse |
Carry forward of Virtual Digital Asset loss to subsequent assessment years | Section 115BBH(2)(b) -- carry forward expressly prohibited | Unlike business loss (eight years) or capital loss (eight years), Virtual Digital Asset loss has zero shelf life |
Indexation benefit on long-held cryptocurrency | Not available -- section 115BBH overrides Capital Gains rules; the second proviso to section 48 does not apply | Even a Bitcoin held for ten years is taxed on the nominal gain at 30% |
Section 87A rebate of rupees twenty-five thousand against tax on Virtual Digital Asset income | Section 87A specifically excludes tax payable under sections 111A, 112, 112A, 115BB, 115BBA, 115BBE, 115BBF, 115BBG, 115BBH, 115BBI | Marginal Virtual Digital Asset gainers in the lowest income bands still pay 30% |
Standard deduction / Section 80C / 80D / 80G deductions against Virtual Digital Asset income | Section 115BBH(2)(a) -- only cost of acquisition is permitted | Chapter VI-A deductions reduce Gross Total Income; they cannot pierce the section 115BBH ring-fence |
The brutal mathematics A trader sells Bitcoin for rupees ten lakh. Acquired three months earlier for rupees seven lakh. Exchange charged rupees ten thousand brokerage on sale. Network gas fees rupees fifteen thousand. Annual subscription to a Virtual Digital Asset tax tracker rupees twelve thousand. Chartered Accountant fee rupees twenty-five thousand. Section 115BBH gain: rupees ten lakh minus rupees seven lakh = rupees three lakh. Tax: 30% of rupees three lakh = rupees ninety thousand, plus 4% Health and Education Cess = rupees ninety-three thousand six hundred. The rupees sixty-two thousand of expenses simply cannot be claimed. |
6. The Set-Off and Carry-Forward Prohibition
Sub-section (2) of section 115BBH contains the most punitive feature of the entire regime -- the loss-treatment rules. The Central Board of Direct Taxes Circular No. 13 of 2022 puts beyond doubt that a loss on the transfer of one Virtual Digital Asset cannot be set off against a gain on the transfer of another Virtual Digital Asset in the same financial year. Each transaction is computed separately; only positive results are aggregated and taxed; negative results disappear.
Set-Off Question | Permitted? | Authority |
|---|---|---|
Bitcoin loss against Ethereum gain in the same year | No | Central Board of Direct Taxes Circular No. 13 of 2022, Question 4 |
Bitcoin loss against business income, salary, capital gains or interest income | No | Section 115BBH(2)(b) |
Carry forward of Virtual Digital Asset loss to next year | No | Section 115BBH(2)(b) |
Set-off of Virtual Digital Asset loss against future Virtual Digital Asset gain | No -- because there is no carry forward to begin with | Section 115BBH(2)(b) |
Salary loss / business loss / capital loss against Virtual Digital Asset gain | No -- the section 115BBH gain is computed separately and the 30% tax is charged on the gross gain | Section 115BBH(1) and the architecture of the section |
Within the same Virtual Digital Asset, can the loss on Lot 1 be netted against the gain on Lot 2 disposed of in the same year? | Yes -- the gain or loss is computed coin-by-coin and lot-by-lot under First-In-First-Out, and the net per coin is what enters section 115BBH | Central Board of Direct Taxes Frequently Asked Questions of 28 June 2022 |
7. Tax Deducted at Source under Section 194S
Section 194S of the Income-tax Act, 1961 obliges the buyer of a Virtual Digital Asset to deduct 1% Tax Deducted at Source on the consideration paid. Where the transaction goes through an Indian exchange, the exchange acts as the deductor under guidelines issued by the Central Board of Direct Taxes. The threshold is rupees fifty thousand per financial year for specified persons (individuals and Hindu Undivided Families not subject to tax audit) and rupees ten thousand for everyone else.
Compliance Item | Statutory Position | Practitioner Note |
|---|---|---|
Rate of Tax Deducted at Source | 1% of gross consideration (not gain) | Even if the trader has made an overall loss for the year, 1% is still withheld on every sale |
Deductor on Indian exchange | The exchange itself, under the Central Board of Direct Taxes guideline of 22 June 2022 | Trader sees the deduction in the contract note; reflects in Form 26AS / Annual Information Statement |
Deductor on peer-to-peer or international transactions | The buyer | If the trader sells to a foreign buyer, the trader must follow up for the Tax Deducted at Source certificate -- frequently absent |
Cumulative threshold per financial year | Rupees fifty thousand for specified persons; rupees ten thousand for everyone else | Once breached, every subsequent rupee of consideration is subject to 1% Tax Deducted at Source |
Treatment in section 115BBH computation | Tax Deducted at Source is creditable against the final 30% tax liability; it is not an expense | Claim the credit in the return of income on the basis of Form 26AS / Annual Information Statement |
8. Worked Example -- A Year in the Life of a Virtual Digital Asset Trader
Mr. Sandeep, a software engineer from Gurugram, traded actively in cryptocurrencies during Tax Year 2026-27. He maintains a single account on an Indian exchange. The transactions during the year are summarised below. He also has salary income of rupees eighteen lakh.
Transaction | Consideration / Cost (rupees) | Section 115BBH Computation |
|---|---|---|
Sold 0.5 Bitcoin (acquired 9 months ago for rupees fourteen lakh) | Sale rupees twenty-two lakh; cost rupees fourteen lakh | Gain rupees eight lakh -- enters section 115BBH |
Sold 4 Ethereum (acquired 18 months ago for rupees seven lakh) | Sale rupees five lakh; cost rupees seven lakh | Loss rupees two lakh -- LAPSES; cannot be set off against the rupees eight lakh Bitcoin gain |
Sold a Non-Fungible Token (acquired for rupees fifty thousand in cryptocurrency) | Sale rupees one lakh twenty thousand; cost rupees fifty thousand | Gain rupees seventy thousand -- enters section 115BBH |
Mining of 0.02 Bitcoin (fair market value on dates of receipt rupees one lakh) | Receipt taxable as Other Sources at slab rate | Adds rupees one lakh to slab income; cost of acquisition for the future sale is rupees one lakh |
Exchange brokerage on sales (rupees thirty-two thousand) | Disallowed under section 115BBH(2)(a) | Cannot reduce section 115BBH gain |
Annual subscription to portfolio tracker (rupees twelve thousand) | Disallowed under section 115BBH(2)(a) | Cannot reduce section 115BBH gain |
Chartered Accountant fee for filing the return (rupees twenty-five thousand) | Disallowed under section 115BBH(2)(a) | Cannot reduce section 115BBH gain |
Tax Deducted at Source on Virtual Digital Asset sales at 1% (rupees twenty-eight thousand fifty) | Creditable against final tax liability | Reflects in Form 26AS |
The bill Net section 115BBH income: rupees eight lakh (Bitcoin) plus rupees seventy thousand (Non-Fungible Token) = rupees eight lakh seventy thousand. Tax at 30%: rupees two lakh sixty-one thousand. Health and Education Cess at 4%: rupees ten thousand four hundred forty. Total: rupees two lakh seventy-one thousand four hundred forty. The rupees two lakh Ethereum loss lapses without any tax shelter. Salary income of rupees eighteen lakh and mining receipt of rupees one lakh are taxed separately at slab / new regime rates. Tax Deducted at Source of rupees twenty-eight thousand fifty is credited against the total liability at the time of return filing. |
9. Reporting in the Return of Income
Reporting Item | Form / Schedule | Note |
|---|---|---|
Gain on transfer of Virtual Digital Asset | Schedule VDA in Income Tax Return Forms 2 and 3 for Assessment Year 2026-27 | Coin-wise listing -- date of acquisition, date of transfer, cost of acquisition, consideration, income |
Tax Deducted at Source claimed | Schedule TDS2 -- against section 194S | Reconcile against Form 26AS and the Annual Information Statement before filing |
Mining receipt | Schedule OS -- Income from Other Sources | Fair market value on the date of mining |
Receipt by way of airdrop | Schedule OS or Schedule Salaries (if linked to employment) | Section 56(2)(x) may apply if without consideration and the threshold is breached |
Holding of Virtual Digital Asset abroad on a foreign exchange | Schedule FA (Foreign Assets) | Mandatory for resident and ordinarily resident assessees |
10. Practitioner Pitfalls and Defensive Documentation
- Maintain a wallet-wise, coin-wise, lot-wise ledger applying the First-In-First-Out method as mandated by the Central Board of Direct Taxes Frequently Asked Questions of 28 June 2022.
- Save annual tax statements from every Indian exchange used; for foreign exchanges, export the full transaction history at year-end -- foreign exchanges may delist the trader's account.
- For airdrops, mining receipts and hard-fork tokens, record the fair market value on the date of receipt with a screenshot of the spot rate from the exchange used; this becomes the cost of acquisition for the subsequent sale.
- Do not net Bitcoin loss against Ethereum gain in computation; the Department's position is clear and any such netting will be reversed in scrutiny.
- Do not capitalise mining hardware, electricity or internet against section 115BBH income; treat them as personal expenditure for tax purposes (book-keeping treatment is independent).
- Reconcile every section 194S Tax Deducted at Source entry in Form 26AS / Annual Information Statement against the trader's own ledger before filing the return -- mismatches are common, and corrections require coordination with the exchange.
- If the trader receives Virtual Digital Asset from a foreign source, examine whether section 56(2)(x) read with the rupees fifty thousand annual threshold applies, and whether the foreign exchange triggers Schedule FA reporting.
- Where consideration is received in another cryptocurrency rather than Indian rupees (a crypto-to-crypto trade), the transaction is still a transfer under section 2(47) and section 115BBH applies; convert consideration to rupees at the spot rate on the date of transfer.
- If business activity (such as a Web3 development firm) accepts cryptocurrency as fee, the receipt is business income at fair value; the subsequent transfer of that cryptocurrency falls under section 115BBH.
11. The Bottom-Line Comparison -- F&O vs Virtual Digital Asset
Dimension | Futures and Options (Article 23) | Virtual Digital Asset (this article) |
|---|---|---|
Charging head | Profits and Gains of Business or Profession (section 28) | Special charging section 115BBH |
Tax rate | Slab rate or section 115BAC rate (zero up to rupees four lakh new regime) | Flat 30% plus surcharge plus 4% Cess |
Brokerage / exchange fees | Allowable | Disallowed |
Goods and Services Tax on brokerage | Allowable | Disallowed (except as part of cost of acquisition) |
Software and subscription costs | Allowable | Disallowed |
Salary, rent, professional fees | Allowable (with Tax Deducted at Source compliance) | Disallowed |
Depreciation on equipment | Allowable at 40% (computers) | Disallowed for tax purposes |
Set-off of loss in same year | Available against any head except Salary | Not available -- inter-Virtual-Digital-Asset set-off barred |
Carry forward of loss | Eight years against business income | Not available |
Section 87A rebate | Available (subject to conditions) | Not available |
Indexation on long-held assets | Not relevant (business income) | Not available |
The strategic takeaway The Virtual Digital Asset regime under section 115BBH is by deliberate legislative design less generous than every other income head in the Income-tax Act, 1961. Practitioners advising clients on Virtual Digital Asset trading should explain at the very first meeting that overhead costs, software subscriptions, professional fees, mining infrastructure and even loss-set-off relief are simply not available. Pre-tax economics is therefore the wrong lens; only post-tax economics matters, and that means projecting the 30% bite plus surcharge plus cess on every realised gain. |
12. Key Takeaways
- Section 115BBH of the Income-tax Act, 1961 charges Virtual Digital Asset gains at a flat 30%, plus surcharge and 4% Health and Education Cess; slab rates and section 87A rebate do not apply.
- Only the cost of acquisition is deductible -- nothing else: no brokerage, no Goods and Services Tax on brokerage (except where part of acquisition price), no network fees, no mining infrastructure, no software, no salary, no rent, no professional fees, no interest.
- Inter-Virtual-Digital-Asset loss set-off is prohibited -- a Bitcoin loss cannot offset an Ethereum gain in the same year (Central Board of Direct Taxes Circular No. 13 of 2022).
- Inter-head loss set-off is prohibited -- Virtual Digital Asset loss cannot reduce salary, business or capital gain income.
- Carry forward of Virtual Digital Asset loss is prohibited -- losses lapse the year they arise.
- The buyer / Indian exchange deducts 1% Tax Deducted at Source under section 194S on every sale once the annual threshold is crossed; the deduction is creditable against final tax.
- Use the First-In-First-Out method per wallet to compute cost of acquisition; maintain coin-wise lot ledgers for at least eight assessment years.
- Schedule VDA in Income Tax Return Forms 2 and 3 requires coin-wise reporting of each transfer.
- The contrast with the Futures and Options regime is sharp -- where almost every business expense is deductible, here almost none is. Plan accordingly.
Disclaimer: This article is for general information only. It does not constitute tax / legal advice. Please consult a qualified Chartered Accountant or tax practitioner for advice specific to your circumstances. The legal position is current as of FA 2024 (No. 2) / FA 2025; subsequent amendments and CBDT notifications may modify the position.