• Notification Date: 24-01-2025
• Notification No: N/A

Taxability of Bitcoin ETFs in Income Tax in India: Will Budget 2025 Increase Taxation by Implying 30 Percent on Virtual Digital Assets?

As India gets ready to present the budget of 2025, the first and foremost question for the investors in Bitcoin ETFs is whether the government is going to hike the tax on Bitcoin ETFs to a flat 30% as compared to the other virtual digital assets, such as Bitcoin. Currently, long-term capital gains on Bitcoin ETFs are taxed at 12.5% under Section 112 of the Indian Income Tax Act.

Major stock exchanges, including Nasdaq and NYSE, have listed Bitcoin ETFs, which provide investors with exposure to Bitcoin without having to hold the cryptocurrency directly. Such exchange-traded funds are safer than unregulated exchanges for investing in Bitcoin, but the tax treatment of Bitcoin ETFs is uncertain.

Under Section 115BBH, the sale of virtual digital assets (VDAs), which include Bitcoin, is taxed at a flat rate of 30%. This provision was introduced in Budget 2022 and was supposed to be levied on cryptocurrencies and other digital assets. In case the government declares Bitcoin ETFs as VDAs, then the sales proceeds emanating from such ETFs will come under this provision. However, to date, no CBDT notification has been issued, and hence Bitcoin ETFs are not taxed as VDAs.

Section 50AA of the Income Tax Act is about the mutual funds that invest in debt-based securities, and since Bitcoin ETFs are not primarily invested in debt instruments, it cannot be applied to Bitcoin ETFs. Currently, Bitcoin ETFs are most likely to be taxed under Section 112, which taxes long-term capital gains from the sale of capital assets at 12.5%.

In view of the emphasis of the government on cryptocurrency taxation and regulation, investment investors will have to follow the updates of Budget 2025 because such a move may help them achieve clarity on how Bitcoin ETFs will be taxed at the LTCG rate of 12.5% or if they come under a slab with a 30% flat tax applied on other virtual assets.

This change would demand a keen eye for information on future tax policies, as investors in Bitcoin ETFs would need to keep themselves updated regarding possible amendments in the Income Tax Act in respect of the taxation of Bitcoin and other cryptocurrencies, as well as other virtual digital assets.