Taxation of Crypto Futures in India – A Complete Analysis

Crypto trading in India has taken many forms, and one of the latest trends is trading in crypto futures—agreements to buy or sell cryptocurrencies at a future date for a fixed price. While many investors and traders have jumped into this space, most are confused about one important thing: how is income from crypto futures taxed in India? Is it covered under the new 30% tax rule for Virtual Digital Assets (VDAs), or does it fall under business or speculative income? In this article, we’ll break down the legal definitions, tax laws, and real-world implications in simple language to help you understand where crypto futures stand in the eyes of Indian tax authorities.

What is a Virtual Digital Asset as per the Income Tax Act?

In India, Crypto Currency is included in the definition of Virtual Digital Asset. To understand how crypto futures might be taxed in India, we first need to understand what exactly is a Virtual Digital Asset (VDA) under Indian tax law. The definition was inserted in the Income Tax Act, 1961 through the Finance Act, 2022, under Section 2(47A). Here’s the full text of the section:

Section 2(47A) – Definition of Virtual Digital Asset

“Virtual digital asset” means—

• any information or code or number or token (not being Indian currency or any foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account and includes its use in any financial transaction or investment, but not limited to, investment scheme; and can be transferred, stored or traded electronically;
• a non-fungible token or any other token of similar nature, by whatever name called;
• any other digital asset, as the Central Government may, by notification in the Official Gazette specify:

Provided that the Central Government may, by notification in the Official Gazette, exclude any digital asset from the definition of virtual digital asset subject to such conditions as may be specified therein.

What Does This Definition Really Mean?

The definition of Virtual Digital Asset (VDA) under the Income Tax Act is written in a very broad and flexible way. It includes any digital code, token, or information that is not traditional currency (like INR or USD), and which can be stored or traded electronically. The asset should represent some value whether real or perceived and may be used in financial transactions or for investment purposes.

This means that most cryptocurrencies like Bitcoin and Ethereum, as well as NFTs and other digital tokens, are clearly covered. Even if a new type of digital asset is launched tomorrow, as long as it meets these criteria, it can be brought under the tax net. The law is designed to be technology-neutral and future-proof.

However, the wide language used like “by whatever name called” and “generated through cryptographic means or otherwise” leaves room for interpretation issues. It could even include digital items that weren’t meant to be investments, such as loyalty points or gaming tokens, unless the government specifically excludes them.

Also, the government has been given the power to add or remove items from the VDA list through official notifications. For example, India’s digital currency (e₹) was excluded from this list by a government notification, which means it won’t be taxed as a VDA.

In short, while the definition helps bring clarity to taxing cryptocurrencies and NFTs, it also raises questions when it comes to complex instruments like crypto futures or options, which are contracts based on VDAs but may not be digital assets themselves. Whether those contracts are taxed the same way or not is still unclear and that’s where the real confusion begins.

What is a Derivative?

Derivatives are financial instruments whose value is derived from an underlying asset, such as shares, commodities, currencies, interest rates, or even cryptocurrencies. They do not have value of their own but depend entirely on the price movements of the asset they are linked to. Common types of derivatives include futures, options, forwards, and swaps. These instruments are widely used for hedging risks and speculating on price changes in financial markets.

Section 2(ac) of Securities Contract (Regulation) Act 1956 – Definition of Derivatives

In India, the legal definition of a derivative is provided under the Securities Contracts (Regulation) Act, 1956 (SCRA). As per Section 2(ac) of the SCRA:

“Derivative” includes—

• a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security; and
• a contract which derives its value from the prices, or index of prices, of underlying securities.

This means that a derivative is either a financial contract based on securities or a price-linked agreement based on any underlying asset. While the Income Tax Act does not define “derivatives” directly, judicial and departmental interpretations generally align with the SCRA definition. The CBDT has also recognised derivatives (like futures and options traded on stock exchanges) as part of business income when held for trading purposes.

Is Crypto Future a Derivative?

Yes, crypto futures are technically derivative contracts, because their value is derived from the price of an underlying asset in this case, a cryptocurrency like Bitcoin or Ethereum. Like traditional futures, a crypto future is an agreement to buy or sell a crypto asset at a predetermined price on a future date. Even though you may never actually own the crypto itself, you’re still exposed to its price movements. This qualifies the contract as a derivative in the general financial sense.

However, under Indian law, particularly the Securities Contracts (Regulation) Act, 1956 (SCRA), a derivative is recognized only if it is based on certain permitted underlying assets (like shares, debt instruments, or commodities) and is traded on a recognized stock exchange. Since cryptocurrencies are not yet recognized as securities or commodities under Indian financial laws, and crypto futures are mostly traded on foreign or unregulated platforms, they do not fall under the formal legal definition of “derivatives” under the SCRA. As a result, while crypto futures are derivatives in principle, they are not legally recognized as such under Indian securities law.

What is a Speculative Transaction as per Income Tax Act – Section 43(5)?

The term “Speculative Transaction” has been defined in the Income Tax Act in section 43(5) which is as below.

“Speculative transaction means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips:

Provided that for the purposes of this clause—

• a contract in respect of raw materials or commodities entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him; or
• a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations; or
• a contract entered into by a member of a forward market or a stock exchange in the course of any transaction intended to guard against loss which may arise in the ordinary course of his business as such member; or
• an eligible transaction in respect of trading in derivatives referred to in clause (ac) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956), carried out in a recognised stock exchange; or
• an eligible transaction in respect of trading in commodity derivatives carried out in a recognised association,

shall not be deemed to be a speculative transaction.”

Derivatives are Speculative Transactions as per Income Tax Act

From above discussion it becomes clear that derivatives are essentially speculative transaction because they are typically settled without actual delivery of the underlying asset. As per Section 43(5), any transaction where the contract is settled otherwise than by delivery—like in most futures and options—is treated as a speculative transaction.

However, the law provides specific exceptions for certain derivative contracts. Notably, derivatives traded on recognized stock exchanges (such as NSE or BSE) are excluded from the speculative category, provided they meet the conditions of being “eligible transactions.” This exception ensures that regular F&O trading in stocks or commodities on SEBI-regulated platforms (such as NCDEX & MCS) is treated as non-speculative business income, making such income more tax-efficient and eligible for broader set-off benefits.

Are Crypto Futures covered within the definition of “Virtual Digital Asset”?

Crypto futures cannot be classified as a “Virtual Digital Asset” (VDA) under the Income Tax Act, 1961, because they do not meet the core characteristics defined in Section 2(47A). The definition of a VDA focuses on any digitally represented value, such as cryptocurrency or NFTs, that is stored, transferred, or traded electronically, and has inherent value or functions as a store of value or unit of account. Crypto futures, on the other hand, are not actual tokens or digital assets; they are derivative contracts based on the price of an underlying VDA, such as Bitcoin or Ethereum.

A crypto future is merely a financial agreement between two parties to buy or sell a cryptocurrency at a predetermined price on a future date. It does not represent ownership of any digital asset, nor is it itself stored or transferred on a blockchain. It lacks the “digital representation of value” that the law requires for classification as a VDA. In fact, it functions more like a speculative paper contract, often settled in cash and not involving the underlying crypto at all.

Since crypto futures are contracts derived from VDAs but are not VDAs themselves, they fall outside the scope of Section 115BBH, which imposes a 30% tax specifically on income from transfer of VDAs. Unless the government specifically notifies such derivative instruments as VDAs (which it has not done as of now), crypto futures should be taxed separately.

Are Crypto Futures covered in the definition of “Speculative Transactions”?

Based on the provisions of Section 43(5) of the Income Tax Act and our earlier discussion, crypto futures are most likely to be classified as speculative transactions under Indian tax law. This is because most crypto futures contracts are settled without the actual delivery of the underlying cryptocurrency and are simply cash-settled based on price differences. As per Section 43(5), such contracts, where no physical or actual transfer of the asset takes place, are considered speculative unless they fall under one of the listed exceptions.

However, crypto futures do not fall under any of the exceptions provided in the proviso to Section 43(5). These exceptions are mainly for contracts in derivatives traded on recognized stock exchanges (like NSE or BSE) and recognized commodity associations. Since cryptocurrencies are not recognized as legal tender, securities, or commodities under Indian financial law, and crypto futures are typically traded on unregulated or foreign exchanges like Binance or Bybit, they do not qualify as “eligible transactions” for the purpose of this exemption.

As a result, income or loss from crypto futures trading is most likely to be treated as speculative business income under Indian tax law.

How Income from Crypto Futures will be taxed as “Speculative Income”?

If crypto futures are treated as speculative income under the Income Tax Act, they will be taxed under the head “Profits and Gains from Business or Profession”, specifically as speculative business income as per Section 43(5). The income will be taxed at the taxpayer’s normal applicable slab rate (for individuals) or 30%  (for companies and firms). Unlike income under Section 115BBH (for Virtual Digital Assets), taxpayers can claim deductions for related business expenses such as internet charges, brokerage fees, subscription costs, and other administrative expenses incurred wholly and exclusively for trading activity.

However, losses from crypto futures, can only be set off against other speculative business income in the same year. They cannot be adjusted against salary, house property, or non-speculative business income. Unabsorbed speculative losses can be carried forward for up to four assessment years, but again, they can only be adjusted against speculative gains in future years. This treatment, though restrictive, still provides greater flexibility than Section 115BBH, which does not allow any set-off or carry-forward of losses.

What are the key differences between Taxation of Crypto Futures and Virtual Digital Assets?

The key difference between the taxation of crypto futures and Virtual Digital Assets (VDAs) lies in how the Income Tax Act treats them. Crypto futures, if classified as speculative income under Section 43(5), are taxed at the taxpayer’s normal slab rate (for individuals) or 30% (for companies). Taxpayers can claim deductions for trading-related expenses and are allowed to set off losses against other speculative gains, with the ability to carry forward such losses for up to four years.

In contrast, VDAs like cryptocurrencies and NFTs are taxed under Section 115BBH at a flat 30% rate, with no deductions allowed (except for the cost of acquisition), and no set-off or carry-forward of losses is permitted. This makes the VDA tax regime far stricter and less flexible than the speculative income regime applicable to crypto futures, resulting in significantly different tax outcomes depending on classification.

To Sum Up

Crypto futures, though based on cryptocurrencies, are fundamentally derivative contracts and do not qualify as Virtual Digital Assets under Section 2(47A) of the Income Tax Act. As a result, they are more appropriately taxed as speculative business income, attracting normal slab or corporate rates, with limited benefits such as expense deductions and loss set-off. Understanding this distinction is crucial for accurate tax planning and compliance.

Disclaimer:

This article is intended solely for educational, research, and analytical purposes. It does not constitute legal or tax advice. Readers are advised to consult a qualified tax professional or legal advisor before making any financial or compliance decisions based on this content.

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