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 some of which are:

  • Litecoin,
  • Ethereum,
  • Zcash,
  • Dash,
  • Ripple, etc.

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. 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, the production of it incurs real cost. 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 known as mining.
    • So, mining is directly proportional to the expense. The competition of solving this complex problem can make the process even 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 for 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?

Bitcoins, as of today, are not centrally administered or regulated by any specific body like the RBI which administers physical currency in India. Bitcoin, as a medium of payment, has neither been authorized nor been regulated by any central authority in India. Every single transaction is recorded in a public list called the blockchain. Bitcoins, as of now, have not been given the status of legal tender in India by RBI.

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Tax on Bitcoin in India

The government has not yet considered the tax on bitcoin in the statute books because bitcoins are quite new to Indian Markets. Since the regulatory framework regarding cryptocurrencies is uncertain, this article tries to analyze the taxation by considering them as both goods and currency. The holding period impacts the taxes on bitcoins. The tax treatment of bitcoins will depend upon its generation. Major approaches currently prevalent are as follows:

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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 is considered as Income from Capital Gains, if they are held for investment. Tax on bitcoin will hence be 15% or 20% based upon the holding period.

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 taxable as business income if traded frequently. Accordingly, the profits arising out of such business would be subject to tax as per the individual slab rates.

Bitcoins received as consideration on 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 received 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 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.