[Alok Singh and Satvik Kapoor are third-year law students at Dr Ram Manohar Lohiya National Law University, Lucknow. In this piece, the authors interrogate the statutory tension between the newly enacted Online Gaming Act, 2025, which criminalises in-game NFTs and play-to-earn tokens as “other stakes”, and the Income Tax Act, 2025, which simultaneously taxes these very assets as legitimate virtual digital property. The piece argues that this is not merely a policy tension but a genuine legal impossibility, in which compliance with one regime would breach the other, and proposes a utility-NFT carve-out, modelled on MiCA and Singapore’s functional approach.]
- INTRODUCTION
On 22 August 2025, Parliament enacted the Promotion and Regulation of Online Gaming Act (‘PROGA’), with an ambition to promote e-sports and prohibit every form of “online money game.” Prior to that enactment, Section 2(111) of the Income Tax Act, 2025 (‘Income Tax Act’‘) defines ‘virtual digital asset’ to explicitly include crypto-assets, and Section 194(1) [Section 115BBH of the Income Tax Act 1961] imposes a 30% flat rate on their transfer. The texts conflict irreconcilably. The definition of “criminal stakes” under the PROGA prohibits NFTs and crypto-assets, while the Income Tax Act designates them as taxable assets. The distinct legislative approaches towards an identical asset exist and create a tension between each statute. For example, according to Section 18 of the PROGA, the PROGA will take precedence over any other conflicting legislation, thereby creating a legal quandary as to whether both statutes are applicable concurrently in relation to crypto-assets.
The article contends that the overall ban imposed by PROGA does not just represent a policy conflict but is in fact a conflict in the strict sense as it goes against the state’s own fiscal and regulatory approach to the gaming NFTs being legitimate taxable AML-compliant objects. This means that there is a type of conduct (the transfer of a play-to-earn NFT) which makes complying with the two legal frameworks at the same time impossible. Furthermore, this incoherence is not merely inconvenient but constitutionally significant, since the state is required to consider less restrictive alternatives before imposing a prohibition of this breadth.
The article is structured in five parts, as follows. First, a textual analysis of Section 2(1)(j) (the “other stakes”). Second, an examination of the VDA architecture as constituting state endorsement. Third, an analysis of Sections 2(1)(j), 5 and 9 of the PROGA and Sections 2(111), 194(1) and 393(1) Income Tax Act 2025 and their concomitant legal injuries. Fourth, a comparison of applicable law under MiCA and Singapore, and finally, a suggested amendment.
- The “Other Stakes”
The definitional architecture of PROGA rests on two interlocking provisions. Section 2(1)(g) defines “online money game” as any online game, irrespective of whether based on skill, chance, or both, played by a user by paying fees, depositing money, or other stakes in expectation of monetary or other enrichment. Section 2(1)(j) then defines “other stakes” in terms that are, on their plain reading, essentially unlimited:
“[A]nything recognised as equivalent or convertible to money and includes credits, coins, tokens or objects or any other similar thing, by whatever name called and whether it is real or virtual, which is purchased by paying money directly or by indirect means or as part of, or in relation to, an online game.”
Every element of this definition captures the essence of in-game NFT. First, in-game NFTs are “virtual” tokens. Second, they are purchased, either directly for fiat currency or via an intermediary token purchase (ETH, MATIC) that is itself funded by fiat. Third, they are acquired “as part of, or in relation to, an online game.”
The Online Gaming Rules 2026 operationalise this through Rule 9’s five-factor monetisation test administered by the Online Gaming Authority of India (OGAI). Rule 9 provides for the constitution of the OGAI to run the structured process to administer with a 90 days’ decision timeline. The process of decision-making is initiated either by OGAI on its own or by a licensed service provider submitting an application or by notification from the concerned authority.
The five factors taken into consideration by OGAI under Rule 9 for determination of ‘Online Game’ are i) payment of fees or other stakes, ii) expectation of monetary winnings, iii) whether fees are used as competition/participation costs in a rule-governed multiplayer event, subscription or one-time access fees or a bet or stake made in expectation of monetary or other winnings, iv) the structure of the revenue model. The fifth factor is the most consequential: whether “rewards, in-game assets or benefits can be transferred, redeemed, monetised or used outside the game environment.”
This implies that a play-to-earn (P2E) game whose NFTs trade freely on secondary markets satisfies this fifth factor by design. Its tokens are, by their very nature, transferable and redeemable outside the game environment. As the Mondaq commentary on the rules for 2026 “If a video game does not directly give players cash prizes but allows its players to freely trade items that will retain their value or will have a significant number of buyers/sellers after they are used, then it has the characteristics of a form of money”.
The irrespective-of-skill clause in Section 2(1)(g) forecloses the principal constitutional escape route that P2E developers would otherwise have. The ability of the player does not have an impact on the legality of the situation; even if the tokens can be converted and cashed outside of the game, it is still considered an online gambling game, and the operator will have committed a cognizable and non-bailable offence pursuant to Sections 5 and 9 of PROGA.
III. THE VDA ARCHITECTURE
Against this prohibition, a comprehensive, multi-layered and state-endorsed framework exists under the Income Tax Act’s VDA provisions, ranging from definition, taxation and withholding of which in-game NFTs are an unambiguous member. The underlying structure for all such regulatory frameworks surrounding in-game NFTs can be derived from Section 2(111) of the Income Tax Act. Under the Income Tax Act the definition of a “VDA” or “Virtual Digital Asset” includes any “non-fungible token or any other digital token, or both”. It is pertinent to note that the major provisions of the Income-tax Act, 2025, which replaced the Income-tax Act, 1961, are substantially the same in content, differing only in section numbering.
Additionally, the Finance Act 2025 inserted sub-clause (d) to explicitly capture “any crypto-asset being a digital representation of value that relies on a cryptographically secured distributed ledger.” An in-game NFT minted on Ethereum or Polygon is straightforwardly a crypto-asset under this definition.
The taxation consequences are equally unambiguous. According to Section 194(1), a flat 30% tax will apply to all income from transferring any VDA, with no deductions beyond acquisition cost, forfeiting the ability to offset against any other income. Section 393(1) [Table Sl. No. 8(vi)] will require 1% TDS to be deducted from the source for all qualifying VDA transfers. These provisions are not simply administrative but rather reflect the recognition of the state of these transactions. A government would not place source deduction obligations on any transactions it believed to be criminal in nature; therefore, TDS reflects a declaration of taxable legitimacy.
Furthermore, the Ministry of Finance’s 2023 PMLA notification classified VDA service providers as “reporting entities” under the Prevention of Money Laundering Act, mandating AML and KYC compliance. On a separate note, the Data Protection and Data Privacy (DPDP) Rules, 2025, implement a 3-year data loss timeline for gaming intermediaries that have 50 lakh or more registered users (as referenced in the 3rd Schedule in Rule 8) thus providing further indirect recognition.
Despite the fact that a P2E developer who has (a) registered her NFT marketplace with the FIU-IND under PMLA; (b) paid advance tax on token issuance income under Section 194(1); and (c) designed her data architecture around the DPDP Rules, faces criminalisation under PROGA’s prohibition, of which three other statutes had expressly brought into the regulated economy.
IV: THE CONSTITUTIVE CONTRADICTION
The Income Tax Act’s VDA framework and Section 18 of PROGA produce two distinct legal problems:
- The ‘Taxed’ Criminal Problem
When a player of play-to-earn (P2E) games acquires non-fungible tokens (NFTs) by means of earning within the game, the player is required to pay tax at the time of transferring (selling) the NFT at a tax rate of 30% on the fair market value, pursuant to 115BBH [Section 194(1) of Income Tax Act 2025]. The player also becomes a participant in a money game as defined in section 2(1)(j) and section 2(1)(g) of PROGA by virtue of acquiring a P2E game using tokens that also meet the requirements of section 5 of PROGA which criminalizes the offering side. The constitutional dimensions of this dissonance are illuminated by the Supreme Court’s settled position, affirmed in CIT v. Piara Singh (1980) and in CIT v. S.C. Kothari (1971) that income derived even from illegal sources is taxable under the Income Tax Act. The apex court observes,“If the business is illegal, neither the profits earned nor the losses incurred would be enforceable in law but that does not take the profits out of the taxing statute.”
The single regulatory framework assumed by the doctrine is that the state finds an action illegal, and therefore taxes the profits from those things regardless of whether they are legal or not. In the case of play-to-earn (P2E), a person may earn money for playing video games; however, the gaming is either classified as illegal and taxed by the income tax act or classified as legal and the profits taxed while being classified as illegal through the PROGA. Therefore, the same transaction can subject someone to both classifying as a criminal as well as an income tax-paying citizen simultaneously, depending on how you classify your actions under either act.
- The No-Loss Set-Off Double Trap
VDA loss cannot be claimed against other income per the Income Tax Act. Players who owned gaming NFTs in multiple failed Web3 games during regulatory uncertainties after PROGA’s enactment were charged 30% tax on their past gains (when those NFTs had value), but will not be allowed to offset the total amount of the value of all of those NFTs against the value of the NFTs at the time of game failure (and worthless). Under PROGA guidelines, since the gaming NFTs are classified as a money game (which are banned), the player did not have an economic interest in the asset. However, the taxation authority will pursue the prior gains and will not allow the player to take losses. Consequently, the player suffers from two injuries; he was taxed on profitable work (gains) with prior tax and unpaid on unprofitable work (everyone else who owns a game who played died, so NFTs should not have value).
- COMPARATIVE PERSPECTIVES
To analyse the legal position, we compare our position with those of other countries.
Firstly, the European Union’s Markets in Crypto-Assets Regulation (MiCA) addresses the NFT question through a principled functional exemption. Recital 10 of MiCA provides that the regulation should not apply to crypto-assets that are unique and not fungible with other crypto-assets, including digital art and collectables. The European Securities and Markets Authority also clarified that true unique NFTs can be excluded, and that nearly 20% of in-game assets will not fall under MiCA as of 2025 based on functional use and not by category of item. The key regulatory insight is that uniqueness and utility should determine a gaming token’s regulatory classification.
MiCA asks what the token is for, and doesn’t focuses only on the way acquisation; in contrast Section 2(1)(j) of PROGA is devoid of any such element. It treats an in-game NFT purchase for fiat and entirely for in-game utility equally as a fungible betting chip. This is because the focus of the law is on the question that ‘whether the money was paid or is the thing convertible’, not upon the character of the token’s functioning.
Secondly, the Monetary Authority of Singapore has implemented regulations through three distinct areas: 1) the regulation of digital payment tokens (DPTs) through the Payments Services Act; 2) the regulation of capital market products through the Securities and Futures Act; and 3) the regulation of utility tokens. However, if a utility token provides the holder access to a valid good or service that exists before the issuance of the utility token, then it is not regulated as either of the first two products. The Monetary Authority will evaluate the holder’s rights rather than the token itself and thus, it is possible for a utility token based on a play-to-earn (P2E), in-game non-fungible token (NFT), that grants the holder access to in-game content but is not created primarily as a financial instrument, to be considered a utility token outside of the DPT regulatory perimeter in Singapore. Nothing equivalent exists in Indian law. In contrast to the use of general definitions in Section 2(1)(j) of Indian law to implement an unintended prohibition on the creation of NFTs. It does not ask what rights the token confers on its holder and as per the generalised prohibitory test it affects almost every tradeable in-game asset regardless of its utility.
South Korea has banned P2E games due to the Game Industry Promotion Act, which has sent local developers overseas and shown the difficulty of enforcing that ban. Now, India is facing a similar challenge. The complete ban applied by India could lead to the similar displacement some of which is already observed: those companies working in compliance with the law have negligible motivation to try to move their operations under new circumstances while incurring the most damage possible if criminalization occurs. On the other hand, the non-compliant offshore operators, which are the actual target of PROGA, may prove to be inaccessible no matter how broad the term “other stakes” is applied.
The shared insight about the structural aspects that regulate both the MiCA and MAS frameworks is that previous compliance as a regulatory requirement (for example, AML obligations) gives an indication of legitimacy, not simply because you meet a regulatory obligation, but because having gone through several layers of compliance shows you have already received a form of distributed endorsement by the state.
- PROPOSED AMENDMENT
To address the paradox through a specific definition exemption, there are two pathways available: either through a Central Government notification under Section 19(2)(e) of PROGA (permitting the prescription of “another matter” furthering the objectives of PROGA); or through a legislative amendment to Section 2(1)(j), adding a proviso. This article proposes to amend the definition of “eligible participant” on multiple tiers:
Provided that for the purposes of this clause, “other stakes” shall not include:
(a) any virtual digital asset as defined in Section 2(111) of the Income Tax Act 2025 that is a non-fungible token, where such token
- represents a unique in-game asset conferring functional utility within the game, and
- has been acquired at a price not exceeding the market rate for such utility, and
- has been reported by the platform of issuance as a virtual digital asset under Section 393(1) of the Income Tax Act 2025; or
(b) any token whose issuance platform is a reporting entity registered with the Financial Intelligence Unit-India under the Prevention of Money Laundering Act 2002.
The first limb of this broad exemption is found in the MiCA Recital 10 definition of crypto-assets that only have a “true” Unique and Non-Fungible status, which are considered to have their value attributed to their own unique features and utility and not just through the market’s ability to interchange them. The second limb of the exemption mirrors Recital 11 of MiCA in indicating that a Unique Identifier is not enough evidence on its own to qualify as Non-Fungible and issues of large household series will also provide strong evidence of Fungibility, thus ensuring that the assets that fall under this exemption do not include those assets that are being claimed as Non-Fungible but have Fungible characteristics associated with them.
The compliance study is a requirement already set forward by the PMLA, which will serve as an operation filter and will not require any new regulatory burden on regulated video game developers; whilst ensuring the state can lawfully target any offshore/unregistered P2E platforms.
The constitutional case for this amendment is strong. The Supreme Court in Internet and Mobile Association of India v. Reserve Bank of India affirmed that the proportionality standard under Article 19(6) requires the state to demonstrate that less restrictive alternatives were considered before a blanket prohibition was imposed. The example of providing game-playing developers with assurance that they will be able to continue developing and delineating their legal obligations, without fear of punitive actions by unregulated gambling operators is a clear example of a less restrictive alternative to addressing the issue of protecting compliant developers.
VII. Conclusion
Both the PROGA and the VDA systems in the Income Tax Act cannot both be accurate regarding what an NFT is in the gaming world. Section 2(1)(j) of the PROGA only indicates if money has been transferred and the proceeds are convertible making it unnecessary to categorize NFTs as assets under Section 194(1). The result of this is that a person is taxed on an activity that is considered illegal in the country with the individual not benefiting from the set-off. MiCA and Singapore eliminate this situation since they regulate the function of NFTs instead of how they are obtained, whereas PROGA does not. The exception proposed in Part VI of this paper attempts to solve the problem on the condition that only utility NFTs are released from the jurisdiction, thereby putting offshore operators in a position when they do not need to report any NFTs to the authorities. Until “other stakes” tracks function over form, PROGA criminalises the very compliance it also taxes.