Tax and Legality of Bitcoin in India

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Divya Singhvi

Bitcoin
Crypto Trading
Tax on Cryptocurrency
Last updated on November 17th, 2022

Cryptocurrency is digital money. Cryptocurrency uses something called cryptography to secure its transactions. With the soaring prices, bitcoins have become a hot favorite amongst Indians lately. In this article, we will be discussing the tax on bitcoin. There are a number of cryptocurrencies that have been created such as Bitcoin, Litecoin, Ethereum, Ripple, etc. Under Budget 2022, the finance minister introduced provisions for tax on cryptocurrency, NFT, and VDA. However, in her Budget Speech, Nirmala Sitharaman also clarified that taxing cryptocurrency does not give them legal status in India.

What is Bitcoin?

Bitcoin often described as a cryptocurrency, a virtual currency, or a digital currency – is a type of money that is completely virtual. It’s like an online version of cash. Bitcoin was the first cryptocurrency generated in 2009. Later, other cryptocurrencies such as Ethereum, ripple, litecoin, dash, etc came into existence.

The Bitcoin apps ensure you have a bitcoin wallet that helps in storing and selling bitcoins. The creation of wallets takes place when you sign in and create your account. Balances of Bitcoin tokens are kept using public and private “keys,” which are long strings of numbers and letters linked through the mathematical encryption algorithm that was used to create them.

Generation of Bitcoins

One can obtain the bitcoins in the following ways:

Tax on Bitcoin & Legality in India?

No specific body administers or regulates Bitcoins similar to RBI which administers physical currency in India. Further, no central authority in India authorises or regulates Bitcoin as a medium of payment. As of now, RBI has not given the status of legal tender in India to cryptocurrency including Bitcoins.

Under Budget 2022, the finance minister introduced Section 115BBH with a 30% tax on virtual digital assets. The definition of virtual digital assets covers cryptocurrency and non-fungible tokens i.e. NFT. Thus, bitcoin is now taxable in India at a 30% rate. However, they are still not recognised as legal currency in India.

This article tries to analyze the taxation on bitcoins by considering them as both goods and currency. The holding period impacts the taxes on bitcoins. The tax treatment of bitcoins will depend upon their generation.

Tax on Bitcoin held as Investment

As per Sec 2(14) of the Income Tax Act, capital asset means “property of any kind held by the assessee whether or not connected with his business or profession”. The definition of ‘Capital Asset‘ provided is widest in itself and covers all kinds of property except those expressly excluded under the Act. Therefore, any gains arising out of the transfer of Bitcoins in exchange for real currency are treated as Income from Capital Gains, if they are held for investment. Bitcoins will give rise to a Long-term capital gain or a short-term capital gain depending on the period of holding of the bitcoin. Tax on Bitcoin held as Stock in Trade

The tax treatment of bitcoins when held as ‘stock in trade’ would give rise to income from business. Gain from the sale of bitcoin is taxable as business income if traded frequently.

Bitcoins received as consideration for the sale of goods and services

Bitcoins received as consideration of goods and services shall be treated on par with receipt of money. The receipt of bitcoin shall constitute income in the hands of the recipient. Further, since the recipient receives this income out of a business or profession, he would be taxed, normally, under the head “Profits or gains from business or profession“. With regards to the disclosure requirement of bitcoin in the income tax return forms, there continues to be a lack of clarity.

Bitcoin Mining

On the taxability of bitcoins earned during the ‘mining’ process, it is said that Bitcoins generated during the ‘mining’ process are classifiable as self-generated capital assets.

The sale of such bitcoins would, in the ordinary course, give rise to capital gains. However, 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. 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.

Note: 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. However, the treatment is not yet clear under Indian law which makes it difficult to conclude how it may be taxed.

FAQ

How to set-up Bitcoin Wallet?

The Bitcoin applications ensure you have a bitcoin wallet that helps in storing and selling bitcoins. The creation of wallets takes place when you sign in and create your account.

What is the minimum amount of bitcoins that you can buy?

One bitcoin today might cost you up to INR 26 lakh but you don’t need to buy a whole bitcoin in the beginning. You can start with as low as INR 500 and buy a tiny portion of a bitcoin. However, there is a maximum limit to the number of bitcoins that you can buy.

How can you buy bitcoins in India?

Buying bitcoins in India is easy. You can choose any of these platforms – Coinsecure, Zebpay, and UnoCoin – which are widely trusted in the world of cryptocurrency.

How did the value of bitcoin increase so dramatically?

Mining is directly proportional to the expense. The competition of solving this complex problem can make the process even costlier. The limited availability of bitcoin has also increased its demand. The limited supply has fueled the bitcoin hype, which has led to a sharp increase in its price.

Can we use bitcoins only in India?

Bitcoins can be used anywhere across the globe because it is digital and is termed to be ‘globally accepted’.

Got Questions? Ask Away!

  1. Hey @Rakesh_Sharma

    There is ambiguity on how to tax cryptocurrency since the Govt doesn’t consider Cryptocurrency as a legal tender. There are 2 schools of thought that discuss can be taxed under Income from Other Sources or Capital gains.

    To understand more about the taxability of Bitcoin, please refer to this article.

  2. Hey,

    If I buy crypto and sell within the same year, what kind tax will be applicable at what rate or is there no tax?

  3. @Latesh_Bayad, there are two schools of thought for taxes on crypto, some believe it should be taxed as capital gains and others believe it should be considered as income from other sources.

    If the cryptocurrency is held as an Investment and being exchanged for Fiat Money it may be treated as capital gains.
    There are some articles which you might find useful

  4. Hey @Shama,

    The taxability of Cryptocurrencies arises under Income from Capital Gains if it is held as investment or trading. The cryptocurrency shall be considered as a Capital Asset and the taxability shall arise in the hands of person owning the same.
    In Your case, since, Person A is owner of the cryptocurrencies; so any gains arising from sale of cryptocurrencies shall be taxable in the hands of Person A as the data/KYC registered with exchange is that of Person A. It shall make no difference if the proceeds are received in Joint Savings A/c which is held along with Person B.
    Person B shall ignore the same proceeds in his ITR as Person A is paying the taxes in his ITR.

    Hope it helps!

  5. Budget 2022 brings taxes on Crypto, NFTs and other Virtual Digital Assets

  6. Hi @Murali_Krishnan_S, if you are receiving profits in India then you will be taxed at 30% + 4% HEC and if you are receiving profits outside of India, then they are not taxable in India. You can also go through the blog attached below which will help you how the new budget affects you crypto trading and profits. Let me know if you need any further clarification. :blush:

  7. Irrespective of my tax slab ; crypto is taxed @30% . ?

    I mean if my income is zero and i made profit from crypto trading Rs. 1 lakh ; i pay tax 30,000/= ? Or i’ll get STGC excemption of 1 lakh ?

    Or crypto is taxed 30% based on my tax slab ?

    In this case ; if my income is 5 lakhs including 1 lakh income from crypto trading ; i declare crypto income in first slab which is taxfree upto 2.50 lakh !

    What is the rule ?

  8. Hi @HIREiN,

    Unlike incomes such as salary, house property, capital gains from equity shares, mutual funds, ETFs etc. the basic exemption limit rule does not apply to income from Crypto, NFTs, and other virtual digital assets.
    Meaning, that even if your total income is below the basic exemption limit you will have to pay tax on your earnings from crypto.

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