Taxation Of Cryptocurrencies As Rewards From Online Gaming

[By Tanya Verma]

The author is a student of Dr. Ram Manohar Lohiya National Law University.



In the Budget 2022, the Finance Minister introduced a provision to impose income tax at a rate of 30% on profits obtained from the transfer of virtual digital assets (VDAs), although a clear provision still lacks, an attempt to shed clarity on VDAs and their exchange has been made. To that, this piece provides an in-depth analysis of the tax implications surrounding direct and indirect taxation, specifically focusing on the complexities involved in determining the taxable nature of winnings, including digital assets such as bitcoins and tokens, that are received as rewards from online games. Further, the article explores legal literature surrounding the skill-chance dichotomy inherent in online gaming and contributes to the existing discourse around technology driven transactions as rewards.


Previously, income earned from cryptocurrencies was taxable based on the nature of the activity. Individuals involved in cryptocurrency investment were taxed under Income from Capital Gains or Income from Other Sources, as per IRS provisions. On the other hand, individuals engaged in cryptocurrency trading were taxed under Income from Business/Profession.However, this classification changed with the introduction of the Finance Bill, 2022.The author believes, considering the unique characteristics of online gaming in India and the necessity for specific regulations regarding taxation, the government has taken steps to address this, however a clear framework still lacks. In terms of income tax, if an individual sells bitcoins received as gaming rewards, the resulting gains would be taxable. The tax treatment of these gains can vary depending on the intent of the individual, whether they classify the gains as business income or capital gains.

Previously, there was no dedicated provision for the taxation of online gaming. Instead, Section 194B of the Income Tax Act (ITA) was applied, which dealt with TDS deduction by person who is “responsible for paying to any person any income by way of winnings from any lottery or crossword puzzle or card game and other game of any sort in an amount exceeding ten thousand rupees.”Additionally, Section 194BB covered TDS deduction for horse racing and wagering. Furthermore, Section 115BB of the Act imposed a 30% tax rate on winnings. Though these provisions existed, it failed to provide an exact framework involving technology driven transactions or a settled position of earnings from games, be it that of skill or of chance.

The Finance Bill 2023 introduces two new sections under ITA to regulate winnings from online gaming:

  1. Section 115BBJ: This section states that net winnings from online games will be subject to a 30% tax rate, effective from April 1, 2023.
  2. Section 194BA: This section mandates the deduction of tax at source at a rate of 30% on winnings from online games, effective from July 1, 2023.

Together, these provisions signify the government’s intent to establish a comprehensive framework for taxing and regulating winnings from online gaming. The introduction of specific tax rates and the requirement of tax deduction at source aim to facilitate better monitoring, compliance, and revenue generation in the evolving landscape of online gaming, primarily under direct taxation provisions.


GST Act lays no specific definition for cryptocurrencies or digital assets, new provisions provide that VDAs cannot be classified as money or securities and are considered as goods for GST purposes. Additionally, the Central Board of Indirect Taxes and Customs (CBIC) has opined that cryptocurrencies are not treated as currency but rather as goods or services, which is important to note as currency is not taxable under the same, while goods and services are subject to taxation under different slabs. Crypto-related activities, including mining, exchange services, wallet services, payment processing, barter systems, and other transactions, require classification as either goods or services to determine the appropriate treatment. However, for determination of tax rates, there is no specific Harmonized System of Nomenclature (HSN) code for digital assets. However, HSN code 960899, which pertains to other miscellaneous articles, is often used with an applicable GST rate of 18%, the highest in that category. To understand how this is implemented, it is important to delve into the skill versus chance discourse.

In a significant development last year, the Online Gaming Industry faced a major upheaval when the Department issued a Show Cause Notice to Gameskraft, demanding an extraordinary sum of Rs. 21,000 crores taxing as Goods at a rate of 28%,  however, the Karnataka High Court delivered a landmark judgment addressing the concerns related to the key questions in the GST-related litigation for the Online Gaming Industry are:

  1. Skill-based or chance-based: Are the games considered skill-based or games of chance (betting/gambling)?
  2. Taxable amount: Should GST be levied on the full amount pooled by players or only on the platform fee charged by Online Gaming Platforms?

Addressing the first prong, the Supreme Court established that competitions requiring a significant degree of skill are not considered gambling. If a game is primarily based on skill, even if it involves an element of chance, it is classified as a game of ‘mere skill.’ The Court relied on the Supreme Court’s judgment and determined that Dream11’s fantasy sports predominantly rely on users’ superior knowledge, judgment, and attention, making it a game of skill rather than chance. Similarly, the Bombay High Court analysed Dream11’s Fantasy Games and concluded that they do not involve betting or gambling since the outcome is not dependent on the real-world performance of any particular team on a given day. Rajasthan High Court reached a similar conclusion and dismissed a Public Interest Litigation, stating that the issue of treating the game ‘Dream11’ as involving betting or gambling has already been settled.

As for the second limb, the target of taxation, in the context of GST, can vary depending on the specific circumstances and regulations of a particular jurisdiction. However, in general, both players and the platform can be subject to GST. Players may be liable to pay GST on in-game purchases or subscription fees, while the platform or the operator of the online game may also have GST obligations on the revenue generated from the game. The exact determination of the tax liability depends on the specific laws and regulations governing GST in the respective jurisdiction.


In general, if bitcoins are received as rewards from online gaming, they are treated as income and are subject to taxation. According to a report by Lumikai, a venture capital firm, India’s gaming market was valued at $2.6 billion in FY22 and is projected to reach $8.6 billion by FY27. The number of gamers in India reached 507 million in FY22, representing a 12% growth from 450 million in FY21, exhibiting the growth and importance of the industry, thereby highlighting the contemporary relevance of the issue taken up.

For GST purposes, the classification of bitcoins as either money or goods determines their tax treatment. If bitcoins are regarded as currency or money, they would not be subject to GST on their trading. However, if the exchange of bitcoins for Indian Rupees (INR) is considered a service, GST may be applicable on the exchange service.In 2020, the Supreme Court in Internet and Mobile Association of India v. RBI invalidated the RBI Circular that prohibited banks from offering services to cryptocurrency exchanges. As a result, engaging in cryptocurrency transactions in India is currently not illegal. If Bitcoins are regarded as currencies, they would be classified as ‘Money’ in the CGST Act, and no GST would be applicable on their trading. However, exchanging Bitcoins for INR could be considered a service, leading to the levy of GST under the category of ‘Financial Services’. If the supplier charges a commission for the exchange service, GST at 18% would be applicable on the commission amount.

For the purpose of calculation of tax on bitcoins, if an individual sells bitcoin, the resulting gains would be subject to taxation, contingent upon the individual’s intent to classify the gains as either business income or capital gains. Additionally, experts suggest that the tax department could classify proceeds from bitcoin sales as business income. Amit Maheshwari, a partner at Ashok Maheshwary & Associates LLP Chartered Accountants, notes that active trading may also lead to the classification of bitcoin transactions as speculative business, subjecting them to regular tax rates.

Another form of rewards includes tokens received via forking or airdrops. Some jurisdictions, including Croatia, Denmark, Estonia, France, and Poland, do not consider the initial acquisition of new tokens through these methods as a taxable event. For airdrops, the value of rewards will be taxed based on the fair market value of the tokens received on exchanges or decentralized exchanges (DEXes) as per Rule 11UA. If the total value of the rewards and other gifts is below Rs 50,000, no tax will be levied. However, if you sell, swap, or spend the tokens later and make a profit, a 30% tax will be imposed on the profits earned from those rewards. Regarding gifts, the tax treatment depends on whether it is money, immovable property, or movable property. VDAs were included as movable properties in Budget 2022. Therefore, crypto gifts received will be taxed as ‘income from other sources’ at regular slab rates if the total value of gifts exceeds Rs 50,000. The Central Economic Intelligence Bureau (CEIB) has proposed applying an 18% GST on bitcoin transactions due to the lack of regulatory measures for cryptocurrencies, which increases the risk of money laundering.


The legal landscape surrounding taxation of online gaming and VDAs is complex and evolving. Court judgments have clarified that skill-based games are not considered gambling, and specific provisions have been introduced in the Income Tax Act to regulate winnings from online gaming. However, challenges remain in determining the taxable nature of earnings from games of skill or chance and establishing precise tax frameworks for technology-driven transactions. The Finance Bill 2022 introduced provisions for income tax on VDA profits and mandated a 1% tax deduction on VDA trades and under GST provisions, VDAs are classified as goods, but specific definitions and tax rates are lacking. Clear and comprehensive regulations are needed to ensure fair taxation and compliance in this growing industry.


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