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Income Tax on Crypto Currency in India

Cryptocurrency is considered as a digital money and known to be more secure that the real money. Cryptocurrency uses cryptography to secure their transactions. Cryptography is a method of converting comprehensible data into complicated codes which are stiff to crack. Cryptocurrencies are consideres as a subset of digital currencies, alternative currencies & virtual currencies (VCs).

Bitcoin was the first cryptocurrency which are introduced in the year 2009. As of now there are many cryptocurrenciies like Litecoin, Ethereum, Zcash, Dash, Ripple etc. In India, Bitcoins becomes popular in these days, given the efforts of the government to move towards a cashless economy.

In present time bitcoins are not centrally regulated or administered by any perticular body like the RBI. In fact, peer-to-peer transactions with bitcoins are managed by blockchain technology which serves as a public ledger for all transactions.

Is bitcoin legal in India?

As mentioned above bitcoin, as a medium of payment, has not authorized and not regulated by any central authority in India. Further there is no set rules, no egulations or guidelines have been laid down for resolving disputes that could arise while dealing with bitcoins. Hence, bitcoin transactions come with their own kind of risks.

How are bitcoins taxed in India?

The concept of bitcoins being quite new to the Indian market, now the government has not yet brought taxability of bitcoins into the statute books. Also, the levy of income tax on bitcoins can’t be ruled out since the Indian income tax laws have always seek to tax income received irrespective of the state in which it is received.

Thus, the possibility of tax on bitcoins can find out under the following circumstances:

Scenario 1: Bitcoin Mining

Bitcoins created by mining are self-generated capital assets. Subsequent sale of such bitcoins would, in the normal course which result in capital gains.

However, the CoA of a bitcoin can’t be determined since it is a self-generated asset. Further, it does not come under the provisions of the Income-tax Act, 1961- Section 55, which particularly defines the cost of acquisition of certain self-generated assets.

Thus, the mechanism of calculating the capital gains calculation fails to follow the Supreme Court decision in the case of B.C. Srinivasa Shetty. Hence, no capital gains tax would attract on the bitcoins mining.

This scenario will continue till such time the government thinks of coming up with an amendment to Section 55 of the income tax Act.

At this moment, the Indian tax laws are tacit on the bitcoins taxability completely, we thought it is good time to comment on a probable contrary view by the income tax authorities. It may be possible that the department may not consider bitcoins as capital assets at all.

Hence, the provisions of capital gains will not applicable at all. The IT authorities may decide to choose to tax the value of bitcoins received from bitcoin mining under the head “Income from other sources (IOS).” 

Scenario 2: Bitcoins as an Investment Being Transferred In Exchange For Real Currency

Bitcoins which are capital assets, have been kept as an investment and are transferred in exchange for real currency, the appreciation in value would give rise to a LTCG i.e.  Long term capital gain or a STCG i.e. short term capital gain depend upon the period of holding of the bitcoin.

Scenario 3: Bitcoins Can Be Used As Stock-In-Trade Being Transferred In Exchange For Real Currency

The income came from bitcoins trading activity would give results to income from business and accordingly, the profits come out of such business would be subject to tax according to the individual tax slab rates.

Scenario 4: Bitcoins being received as consideration on sale of goods & services

Bitcoins being received so shall be treated as equivalent to receipt of money. It would make income in the hands of the recipient. Further, since the recipient received this income out of a business or profession, he/she would be taxed, normally, under the head profits or gains from business or profession.

The Government doesn’t ponder crypto-currencies legal tender or coin and will take all measures to alienate use of these crypto assets in financing illegal activities. The Government will find out the use of blockchain technology aggressively for ushering in digital economy. ”Further, the Central Bank also has chosen to reinforce their earlier message to “users, holders & traders of VCs (Virtual Currencies) including bitcoins regarding the potential economic, financial, operational, legal, customer protection and security related risks involved in dealing with such Virtual Currencies.”

Thus, bitcoin transactions are quietly 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 banish the ambiguity around the legality of bitcoins, their taxability & disclosure need of bitcoins.