Cryptocurrency F&O: How are gains taxed in India? Know rules and ways to report in ITR

Cryptocurrency futures and options (F&O) refers to the trading of derivative contracts based on underlying digital assets like Bitcoin and Ethereum. It allows you to take positions on price movements or hedge existing positions without actually buying or owning the asset in its physical form.

In India, the tax treatment of such instruments remains an evolving area as the Indian tax department has not yet issue specific guidance on crypto F&O taxation, according to Prateek Gupta, Head of Business at Mudrex.

How crypto F&O work?

As cryptocurrency F&O trading has emerged as a growing segment within digital asset markets, let's see it works:

• Crypto Futures trading: An investor agrees to buy or sell a crypto asset at a predetermined price on a specified future date, with both profit and loss depending on how the market price moves at expiry or before settlement.
• Crypto Options trading: The investor pays a premium to gain the right, but not the obligation, to buy (call option) or sell (put option) a cryptocurrency at a fixed price within a set time period. These contracts are typically cash-settled, meaning traders do not take delivery of actual crypto assets and instead settle gains or losses based on price differences.

How are crypto F&O gains generally taxed in India?

Income from crypto F&O is generally treated as non-speculative business income, similar to other derivative transactions, said Chandni Anandan, Tax Expert at ClearTax. Since crypto F&O contracts are derivatives and not virtual digital assets (VDAs) themselves, the flat 30% tax rate applicable to VDAs does not apply.

Additionally the 1% TDS (tax deducted at source) also does not apply on such transactions. Many tax practitioners view the resulting gains as business income taxable at the applicable slab rates.

For INR-settled contracts, gains are generally treated as business income because settlements happen entirely in cash. However, contracts settled in crypto assets such as USDT present a more complex scenario, Gupta said.

“Since the profit or loss is ultimately received in a VDA, many tax professionals believe such transactions may fall within the scope of the VDA tax regime. The settlement mechanism therefore plays a critical role in determining the tax treatment,” he added.

Can crypto F&O losses be set off against other income or carried forward?

Yes, since crypto F&O losses are treated as business losses, they can be set off against other business income, capital gains, and house property income, subject to applicable tax provisions, Anandan said.

“However, such losses cannot be set off against salary income. Unabsorbed losses may be carried forward as per the rules applicable to business losses,” she added.

How should taxpayers report crypto F&O income in their ITR?

Gupta clarified that crypto F&O income is generally reported under the head "Profits and Gains from Business or Profession" and therefore requires filing under ITR-3. This differs from spot crypto transactions, which are typically disclosed under the VDA reporting framework.

Taxpayers are advised to maintain detailed records of trades, exchange statements, contract notes, and profit-and-loss reports to support their filings.

Depending on turnover and other prescribed thresholds, tax audit provisions under Section 44AB may also become applicable. Given the lack of explicit guidance on crypto derivatives, maintaining robust documentation and obtaining professional tax advice is advisable.