Tax and Legality of Bitcoin in India

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:

• Mining
  • Even though bitcoin is a virtual currency, its production incurs real costs. One has to ‘mine’ bitcoins and this process consumes electricity.
  • Every Individual (called the “miner”) has to solve a complicated cryptographic problem and the miner is rewarded with a block of bitcoins.
  • People set up powerful computers just to try and get Bitcoins. This is Bitcoin mining.
  • So, mining is directly proportional to the expense. The competition in solving this complex problem can make the process even more costlier.
• Buying on an exchange against real Currency
  • You can buy bitcoins from bitcoin exchanges and store them in an online bitcoin wallet in digital form.
  • You can choose any of these Bitcoin exchange platforms – Coinsecure, Zebpay, UnoCoin, etc
  • Bitcoins are purchasable in consideration of real currency.
• In consideration of goods and services
  • You can use bitcoins (instead of real currency) to buy products and services, but not many shops accept Bitcoin yet and some countries have banned it altogether.

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