Bitcoin is one of the earliest forms of cryptocurrency, forming part of the worldwide peer-to-peer payment system.
Cryptocurrency is digital money. It is considered to be more secure than real money. Cryptocurrency uses something called cryptography to secure its transactions. Cryptography, to put it in simple words is a method of converting comprehensible data into complicated codes which are tough to crack. Cryptocurrencies are classified as a subset of digital currencies, alternative currencies and virtual currencies.
Bitcoin was the first-ever cryptocurrency created in the year 2009. Subsequently, there has been a rapid increase in the number of cryptocurrencies that have been created some of which are Litecoin, Ethereum, Zcash, Dash, Ripple etc. Bitcoins, in India, have slowly started gaining popularity, given the efforts of the government to move towards a cashless economy.
However, one should know that bitcoins, as of today, are not centrally administered or regulated by any specific body like the RBI which administers physical currency in India. In fact, peer-to-peer transactions with bitcoins are managed using something known as blockchain technology which serves as a public ledger for all transactions.
Everyone cannot be a bitcoin miner. Hence, you can consider buying bitcoins from bitcoin exchanges and store them in an online bitcoin wallet in digital form. Binance, WazirX, Coindcx, BitBns etc., are some of the bitcoin exchanges presently in India. Such bitcoins would be purchased in consideration of real currency.
It would be interesting to note that currently, the value of 1 bitcoin is approximately about INR 42,07,162.
As earlier discussed, bitcoin, as a medium of payment, has neither been authorized nor been regulated by any central authority in India. Further, no set rules, regulations or guidelines have been laid down for resolving disputes that could arise while dealing with bitcoins. Hence, bitcoin transactions come with their own set of risks.
Many countries already have a taxation system for cryptocurrency gains in place, but India’s frigid response to the virtual currency ecosystem makes it tough for investors to file their tax returns. Indians had parked nearly $6.6 billion (Rs 49,189 crore) in cryptocurrencies as of May this year, as compared to around just $923 million until April 2020, according to blockchain data firm Chainalysis.
As cryptocurrency regulations in India remain ambiguous, a growing number of Indians are accessing digital tokens by buying and selling on foreign platforms, which may have better features and customer service. If Indian authorities warm to the crypto token market, however, that could pull some of that business back to domestic crypto exchanges.
The Indian government may levy the 18% Goods and Services Tax on transactions on foreign cryptocurrency exchanges in order to level the playing field with domestic ones, according to reports in July. India has also reportedly considered a 2% equalisation levy on transactions with foreign crypto exchanges. For Indian cryptocurrency exchanges, the 18% GST is charged as the trading fee to customers, which is similar to the setup for stock brokerages.
Market players are now biting their nails ahead of the winter session of the Indian Parliament when the country’s first cryptocurrency legislation is likely to be presented. The Cryptocurrency and Regulation of Official Digital Currency Bill are expected to contain disclosure requirements for income tax returns for crypto holdings in India as well as on foreign crypto exchanges by Indian residents.
This may allow the government to regulate cryptocurrency transactions, and the legitimacy provided to digital tokens could give investors more confidence in the sector. Many cryptocurrency enthusiasts believe that regulating cryptocurrency will generate tax revenues for the Indian government as well.
But expects the Indian government may introduce special income tax rates to tax profits from cryptocurrency transactions and may identify such transactions through recognised platforms only.
The concept of bitcoins being quite new to the Indian market, apparently the government has not yet brought the taxability of bitcoins into the statute books. At the same time, the levy of tax on bitcoins cannot be ruled out because the Indian income tax laws have always sought to tax income received irrespective of the form in which it is received.
Therefore, the possibility of a tax on bitcoins can be looked at under the following circumstances:
Bitcoins created by mining are self-generated capital assets. Subsequent sale of such bitcoins would, in the ordinary course, give rise to capital gains.
However, one may note that the cost of acquisition of a bitcoin cannot be determined as it is a self-generated asset. Furthermore, it does not fall under the provisions of Section 55 of the Income-tax Act, 1961 which specifically defines the cost of acquisition of certain self-generated assets.
Therefore, the capital gains computation mechanism fails following the Supreme Court decision in the case of B.C.Srinivasa Shetty. Hence, no capital gains tax would arise on the mining of bitcoins.
This position would hold till such time the government thinks of coming up with an amendment to Section 55 of the Act.
At this juncture, given that the Indian tax laws are silent on the taxability of bitcoins completely, we thought it right to comment on a probable contrary view by the income tax authorities. There is a possibility that the department may not consider bitcoins as capital assets at all.
Hence, the provisions of capital gains would not apply at all. Accordingly, the income tax authorities may choose to tax the value of bitcoins received from mining under the head “Income from other sources”
If bitcoins, which are capital assets, have been held as an investment and are transferred in exchange for real currency, the appreciation in value would give rise to a long term capital gain or a short term capital gain depending on the period of holding of the bitcoin.
Further, long term gains would be taxed at a flat rate of 20% while short term gains would be taxed at the individual slab rate. The cost of acquisition for arriving at long term capital gains will be determined after giving the benefit of indexation. A simple example is given below to understand this :
| Particulars | Value in INR (Only hypothetical) |
|---|---|
| No. of bitcoins purchased | 10 |
| INR equivalent of 1 bitcoin at the time of purchase | 2.72 |
| Value of bitcoins (A) | 27.2 |
| INR equivalent of 1 bitcoin on the date of transfer | 8.72 |
| Value of bitcoins (B) | 87.2 |
| Capital gains (B - A) | 60.00 |
Reiterating the probable contrary view of the income tax authorities discussed under Point 1 above, the IT authorities may not consider Bitcoins as a capital asset and hence the provisions of capital gains would not apply.
Accordingly, the income tax authorities may choose to tax the gains from bitcoins under the head “Income from other sources”.
Further, if the income gets taxed under “Income from other sources”, the taxpayer would have to pay taxes at a rate as applicable to the tax slab he falls under.
For eg, if his taxable income exceeds Rs 10 lakh, he would be liable to a tax @ 30% as against the flat rate of tax of 20% he would be liable to pay if charged to tax under long-term capital gains. The benefit of indexation as would be available if taxed under capital gains, would also not be available if taxed under Income from other sources.
Bitcoins being received so shall be treated on par with receipt of money. It would constitute income in the hands of the recipient. Further, since the recipient received this income out of a business or profession, he would be taxed, normally, under the head profits or gains from business or profession.
As regards the disclosure requirement of bitcoins in the income tax return forms, there continues to be a lack of clarity. In the budget 2018, our Finance Minister, Mr Arun Jaitley, has stated in the budget speech, “112. Distributed ledger system or blockchain technology allows the organisation of any chain of records or transactions without the need for intermediaries. The Government does not consider crypto-currencies legal tender or coin and will take all measures to eliminate the use of these crypto-assets in financing illegitimate activities or as part of the payment system. The Government will explore the use of blockchain technology proactively for ushering in the digital economy.” Further, the Central Bank also has chosen to reinforce its earlier message to “users, holders and traders of Virtual Currencies (“VCs”) including bitcoins regarding the potential economic, financial, operational, legal, customer protection and security related risks associated in dealing with such VCs.”
Therefore, considering that bitcoin transactions are gradually picking up in India, while, laws regulating them are significantly absent, we are hopeful that the government will come up with a notification soon to dispel the ambiguity around the legality of bitcoins, their taxability and disclosure requirement of bitcoins.
While this article aims at discussing the taxability of Bitcoins only, the tax treatment on transacting with other cryptocurrencies would also be similar to that in the case of Bitcoins.