India's crypto space is fast-growing, ranging from millions of users participating in DeFi platforms to buying NFTs, earning staking rewards, and participating in blockchain gaming ecosystems. But just about everything on how modern digital assets are taxed remains pretty vague. The dichotomy between traditional tax laws and emerging Web3 technologies has promulgated uncertainty across investors, creators, gamers, and even professionals dealing with taxes.
Although India brought in taxation on Virtual Digital Assets in 2022-which has the basic stipulation of a flat 30% tax on gains and 1% TDS on the transfer thereof-the law has given hardly any clue with respect to the classification of DeFi interest, NFT royalty, game-based earnings, airdrops, staking rewards, or yield farming. It is for this reason that these activities, different from traditional financial systems, raise confusion with regard to whether such income falls under the category of capital gains, business income, or miscellaneous income.
In this article, we try to understand why these categories of digital assets create so much confusion, how India's tax system interprets them today, and the challenges its users face while trying to stay compliant.
The Regulatory vs. Technological Gap
The law does not define what DeFi, staking, and gaming tokens are
The confusion is mainly due to the fact that India's tax laws only mention VDAs but do not actually define Web3-specific concepts such as:
DeFi protocols
Yield farming
Lending/Borrowing of tokens
Blockchain staking mechanisms
NFT royalties
P2E economy tokens
Governance tokens
Liquidity pool tokens
Due to the fact that these activities are not explicitly enumerated under the Income Tax Act, taxpayers are forced to interpret them under broad categorizations, which is what brings about inconsistent reporting.
Example:
A staking reward could be interpreted as the
income from other sources,
business income, or
VDA income.
Compounding the confusion, different tax experts apply different categories.
Crypto transactions don’t resemble traditional financial activities
The structure of DeFi and NFT transactions is fundamentally different from traditional systems. Banks, intermediaries, and centralized brokers typically provide clean documentation, fixed definitions, and uniform processes. DeFi, on the other hand, operates through smart contracts, decentralization, and token swaps — processes unfamiliar to tax authorities.
Here is a quick comparison:
Asset Type | Traditional Equivalent | Why It Confuses Taxpayers |
DeFi yield | Bank interest | Not issued by a regulated bank; fluctuating rewards |
NFTs | Collectibles/art | Can represent many asset types with different values |
Gaming tokens | Game items/points | Some have real market value others do not |
Staking rewards | Dividends/interest | Tax timing & valuation unclear |
This mismatch forces users to guess how the law might treat these digital assets — a major contributor to tax confusion.
Why DeFi Creates Major Tax Ambiguity
Decentralized Finance (DeFi) platforms enable users to borrow, lend, stake, swap, and earn passive yield without intermediaries. These sophisticated financial operations create tax complications because each activity may be seen as a taxable event — even when users are not converting tokens to fiat currency.
Tokens exchanged inside DeFi protocols may still be taxed
DeFi platforms often require users to interact with tokens in ways that India’s tax laws treat as transfers.
For example:
Swapping ETH for USDT
Depositing tokens into a liquidity pool
Receiving LP tokens in return
Borrowing stablecoins against collateral
Automatically earning yield
Under the VDA tax rule:
Every crypto-to-crypto trade is taxable, even if investors do not “cash out” into INR.
This leads to confusion because:
LP tokens don’t have a predictable market value.
Rewards are often paid in the same asset or an entirely different token.
Some tokens have no reliable price feed.
Moving assets across protocols (bridging) looks like “transfer” even if ownership remains unchanged.
Common user questions:
Does providing liquidity count as selling my tokens?
Are LP tokens taxable the moment I receive them?
Does impermanent loss impact taxable gains?
Is DeFi yield capital gain or income?
No official answers exist, making reporting extremely challenging.
NFT Taxation Is Not Straightforward
NFTs are not a single type of asset — they can represent anything from art and digital collectibles to in-game characters, event passes, identity tokens, and more. Because of this diversity, no single tax rule applies uniformly to all NFTs.
NFT creators vs. NFT traders
Creators may earn:
Royalties from secondary sales
Revenue from primary mint sales
Traders may earn:
Profit from buying low and selling high
Gains from flipping limited-edition NFTs
Why this creates confusion:
Royalties might be treated as “royalty income,” not VDA gains.
Traders might pay 30%, but creators might fall into different tax slabs.
Some NFTs may not be considered VDAs if they represent utility or identity items.
For example:
An NFT that only acts as a movie ticket might not be taxed like a traditional digital asset, but India hasn’t clarified this yet.
Marketplace fees and gas fees complicate reporting
Every NFT transaction requires gas fees or platform fees in crypto.
Users are unsure whether these fees count as:
Deductible expenses
Acquisition costs
Transfer charges
Business expenses
Additionally, tracking hundreds of small gas-fee transactions becomes extremely difficult during tax filing.
Staking Rewards: Income or Capital Gain?
Staking allows users to lock their tokens to support blockchain operations in exchange for reward tokens. But the tax implications are unclear.
Staking creates several tax questions:
Are rewards taxed immediately at their fair market value?
Are they taxed again when sold?
What if token prices fluctuate significantly between earning and selling?
Do validator or staking pool commissions count as expenses?
This is also where most users first encounter the term Crypto Tax, while trying to determine the correct classification.
Key Confusion Points
Some countries tax staking at the time of receipt; India hasn't clarified.
Rewards are often issued multiple times daily — does every tiny payout count as taxable income?
Some staking rewards are directly locked — can you tax income you can't access?
These uncertainties make staking one of the most confusing tax areas.
Gaming Tokens Complicate Taxation Even More
The Web3 gaming industry involves earning tokens, trading NFTs, and receiving in-game digital assets. Many games operate with complex token economies that mix gameplay rewards with real monetary value.
Players may earn through:
Play-to-earn tokens
NFT characters, skins, or weapons
Challenge rewards
Airdrops
Special event tokens
Marketplace flipping
Why this is especially confusing:
Some gaming assets have stable value, while others fluctuate wildly.
Some tokens cannot be withdrawn to a wallet — they remain in-game.
Some rewards are purely utility and not tradable.
Some games issue governance tokens that have investment-like characteristics.
Common questions users ask:
Are gaming rewards taxable even if I only use them in the game?
What if I never convert them to INR?
Do I need to calculate taxes on every micro-transaction?
Are NFTs inside games treated as assets or consumables?
Because India hasn’t issued game-specific VDA rules, users remain unsure how to file taxes correctly.
Major Reasons Behind India’s Tax Confusion
Lack of official definitions
Web3 technologies move faster than regulation, leaving tax laws outdated.
On-chain transactions generate enormous data
Some DeFi protocols generate thousands of tiny interactions daily, making reporting impractical.
No clarity on gas fees and blockchain expenses
Without clear rules on deductibility, filing becomes guesswork.
Token prices are highly volatile
Taxing at “fair market value” is hard when values change every second.
Cross-chain transfers falsely appear like “sales”
Bridging tokens across networks may technically look like a VDA transfer.
Pros and Cons of Current Crypto Tax Structure
Pros
Clear flat 30% rate
Standardized rules for centralized exchanges
1% TDS creates traceable transactions
Cons
DeFi transactions remain undefined
Staking rewards lack specific tax timing rules
NFT creators and traders have different possible interpretations
Gaming income has no official guidelines
No loss offset option
Gas fees not clarified
What Indian Crypto Users Can Do For Now
Maintain detailed transaction records
Tracking:
Wallet addresses
On-chain hashes
Token prices at transaction time
Screenshots of protocol activities
Use crypto tax software
These tools can track complex DeFi, NFT, and gaming transactions.
Apply consistent classification
Choose a tax treatment and apply it consistently to avoid conflict.
Stay updated with compliance announcements
Future CBDT notifications may clarify Web3-specific tax rules.
Conclusion
DeFi platforms, NFTs, staking rewards, and gaming tokens represent the future of digital finance and entertainment, but they do not fit neatly into India’s existing tax framework. Without explicit guidelines, taxpayers face significant confusion while filing returns. Until India issues specific rules addressing these complex digital asset categories, individuals must rely on consistent interpretations, detailed record-keeping, and careful tracking of all on-chain activity.
A more comprehensive regulatory framework will eventually bring clarity, but for now, understanding the nuances behind these technologies is essential for navigating India’s evolving crypto tax landscape.
People Also Ask (PAA)
Q1: Do I have to pay tax on every crypto trade in India?
Yes. Under current VDA laws, every crypto-to-crypto trade (including swaps inside DeFi) is taxable.
Q2: Are NFT airdrops taxable?
Most likely yes, as “income from other sources,” but official clarification is awaited.
Q3: Is staking income taxed when received or when sold?
India has not specified. Most users follow expert interpretations rather than formal rules.
Q4: Are gaming rewards taxed even if I don’t withdraw them?
If they have fair market value, they are generally considered taxable — but no formal rule exists.
Q5: Can I offset crypto losses?
No. Crypto losses cannot be set off against any gains and cannot be carried forward.
