[Opinion] All About Section 115BBH | Taxation of Virtual Digital Assets

Poornima R – [2026] 184 taxmann.com 292 (Article)

A. Let’s Look at the Provisions

Section 115BBH of Income Tax Act 1961, specifies the tax rate and the computation mechanism for income arising on transfer of Virtual Digital Assets (VDA), which includes crypto.

B. Provision

The provision states, while computing tax payable on income from transfer of VDA, “Notwithstanding anything contained in any other provision of this Act…”

• the income from transfer of VDA shall be taxable at the rate of 30%.
• other than cost of acquisition of VDA, no other deduction of any expenditure or allowance or set off of loss incurred, shall be allowed.
• Further, no carry forward of VDA losses is allowed.

C. Let’s Analyse Each Limb Individually

1. Tax on Income from Transfer of VDA Shall Be Calculated at 30%

• This overrides any other provision of Income-tax Act, which provides a rate of tax for any income.
• Like, provisions of section 112 while computing income from capital gains and beneficial provisions like 115BA, 115BAA, etc. while computing income from business.
• Effectively, whether you offer the income from VDA as capital gains, business income or other sources, the income will regardless be taxable at the rate of 30%.

2. No Deduction of Expenditure (Other Than Cost of Acquisition, If Any) or Allowance or Set-off of Losses Shall be Allowed in Computing Income from Transfer of VDA

a. ‘No Deduction of Expenditure (Other Than Cost of Acquisition, If Any)’

• Any costs incurred to earn the income from transfer of VDA, other than the cost of acquisition of VDA, will not be allowed as deduction.
• This results in barring the deduction of costs like interest, brokerage, consultancy charges, etc. while computing income from transfer of VDA.

b. ‘Allowance’

• The word allowance is not defined in the Act, so we take reference from the judicial interpretation and the context of the provisions to analyse this.
• We invoke ‘noscitur a sociis’ and ‘ejusdem generis’1, which means if the meaning of any term in the provision is not clear, it shall be interpreted in line with, and not be extended beyond, the meaning and the context of the specific words around it.
• Accordingly, the word ‘allowance’ will be interpreted in the context of the word ‘expenditure’. Which means no deduction of any allowance shall be allowed in computation of income from transfer of VDA similar to any expenditure.
• In the context of business income: allowance such as allowance of depreciation or allowance for bad debts shall not be allowed as deduction.
• In the context of capital gains: any allowance such as allowance of benefit of indexation shall be allowed.
• In the context of salary (if salary is received in crypto): deduction of allowances such as HRA, LTA, meal allowances, etc. shall not be allowed.

c. ‘Set-off of Losses’

• No set-off of losses incurred shall be allowed in computation of income from transfer of VDA.
• Here, the provision prohibits set-off of both, inter and intra head losses. Let’s break this down further-

i. Intra-head Set-off of Losses

• This position is clearer under the head Capital Gains. For instance, profit arising on the sale of one bitcoin cannot be set off against the loss incurred on the sale of another bitcoin, since capital gains are computed asset-wise, and each transfer is treated as a separate taxable event.
• This is backed up by clarification issued by Finance Ministry that loss from transfer of a VDA cannot be set off against the income arising from transfer of another VDA, thereby removing any ambiguity and clearly reflecting the legislative intent.
• However, an interesting interpretation arises in the context of business income. If crypto is held as stock, each unit would form part of inventory, and the business profit or loss does not occur merely by selling one unit at a price higher or lower than its purchase cost. Instead, income is computed by aggregating the results of all transactions during the period.
• Thus, where some VDAs are sold at a profit and others at a loss, the profit and loss account reflects the net result. Under Section 2(24)(i), “income” includes profits and gains, and Section 28(i) taxes profits and gains of business or profession. Thus, the net profit or loss for the year forms part of total income for the purposes of Section 115BBH(1).
• Accordingly, netting off units of VDA sold at a loss with units sold at profit during the year occurs at the stage of computing business income, and not by way of set-off under sections 70 to 71 (which is clearly not allowed under section 115BBH).
• Hence, it can be argued that the provisions do not prohibit inter se adjustment of profits and losses from transfer of VDAs, insofar as such adjustment arises as part of the computation of business profits for the accounting year itself.
• However, in light of the intent of section 115BBH as clarified by the Finance Ministry, as stated above, even while computing business income, the loss from sale of each unit of VDA is likely to be dealt with on a unit-by-unit basis.
• Since section 115BBH does not permit adjustment of loss from one VDA against gain from another, this interpretation stands rejected.
• It is a settled principle that courts3 will not adopt an interpretation which defeats the clear legislative intent, even if such an interpretation could be inferred from the plain reading of the statute.
• Further, it is pertinent to note that the relevant Income Tax return form, issued by the Central Board of Direct Taxes (CBDT), specifically contains Schedule VDA for reporting income from transfer of Virtual Digital Assets (VDA)
• As it can be seen from above, Schedule VDA shows that the computation mechanism permits aggregation of only positive income under the head “Business Income” or “Capital Gains,” without allowing adjustment of losses, if any. This structure itself clarifies the legislative intent that losses from VDA transfers are not to be set off while computing taxable income under this head.
• The manner in which the return form is designed reinforces the statutory intent. When the computation framework itself excludes the possibility of loss adjustment, it would be impermissible to read into the provision an interpretation that indirectly achieves what the statute directly prohibits. The legislative intent, once clearly expressed both in the statutory language and the prescribed reporting mechanism, cannot be diluted, bypassed, or neutralised through interpretational ingenuity.
• Therefore, having regard to the unambiguous language of Section 115BBH, the express clarification issued by the Finance Ministry, and the structural design of Schedule VDA, it is evident that loss from one VDA cannot be adjusted against gain from another, whether under the head “Capital Gains” or “Business Income.” Any contrary interpretation would undermine the express mandate of the statute and defeat its object.

ii. Inter-head Set-off of Losses

• A plain reading of the provisions makes it clear that losses from transfer of VDA cannot be set off against income under any other head, whether such VDA income is assessed as “Business Income” or “Capital Gains.”
• In other words, notwithstanding anything contained in Chapter VI (Aggregation of income and set-off or carry forward of loss), VDA losses cannot be adjusted while computing income under Section 115BBH.
• Thus, such loss is not allowed to be set off against any income.

3. No Carry Forward of VDA Losses is Allowed

• Section 115BBH(2)(b) expressly provides that loss from the transfer of a VDA cannot be set off against income computed under any other provision of the Act. Further, such loss is also not permitted to be carried forward to subsequent years.

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