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How is Bitcoin taxed in India

You've read about the crazy gains people have made from Bitcoin. A friend of a friend made lakhs of rupees by investing in Bitcoin and you want a piece of the action - before you start, it's important to understand how Bitcoin is taxed in India

Let's get into it!

INTRODUCTION


The term ‘Cryptocurrency’ needs no formal introduction today. It is both ­­- a Technology and a Currency – more commonly known as the “Currency of the Internet”. Cryptocurrency may be classified as a subset of digital currency, alternative currency or virtual currency.


BITCOIN (BTC) was the first ever cryptocurrency created in the year 2009 (Co-incidence much?). Bitcoin was invented soon after the global market crash of 2008. With no corporate middlemen or closeted transactions, Bitcoin left little room for corruption - something that could not be said about other financial institutions at the time.


Over the past decade, Bitcoin has become an invisible commodity in our society. Subsequently, newer cryptocurrencies have also been created like Ethereum, Ripple and Litecoin to name a few.


Did you know?

The first official commercial transaction made with Bitcoins was of two pizzas in Jacksonville, Florida - sold for 10,000 BTC. Today, that amount is worth more than $35.25 million! And Bitcoin owners are purchasing a lot more than pizza now.

Before we get into the taxation aspect, it's important to understand how you can actually obtain Bitcoin.


HOW TO OBTAIN BITCOINS?


At the moment, there are three widely known sources for obtaining Bitcoins:


A.BITCOIN MINING:

Bitcoins are backed by millions of computers across the world called “Miners”. Bitcoin miners verify transactions in ‘blocks’ and add them to a public record called the ‘Blockchain’. Miners are awarded 12.5 BTC whenever they add a new block of transactions.


B. BITCOIN WALLETS:

One may obtain Bitcoins as consideration for selling Goods and / or Services. One can also exchange real money for Bitcoins, hold them as an investment, accept Bitcoins as payment, earn interest from lending Bitcoins etc. A Bitcoin wallet stores the digital credentials of the Bitcoin holdings and allows one to access (and spend) as and when required.


C. BITCOIN TRADING:

Bitcoin trading is the act of Buying Low and Selling High. Unlike Investing, which means holding Bitcoins for the long run, Trading involves trying to predict price movements by studying the industry and graphs as a whole. Unocoin, ZebPay and WazirX are some of the Bitcoin exchanges present in India.


Did you know?

Currently, the value of 1 BTC is more than INR 29,00,000! Of course you do - you would'nt be reading this article otherwise. Crazy, right?

IS BITCOIN LEGAL IN INDIA?


There is a lack of clarity over the status of Cryptocurrencies in India.


The Supreme Court of India in 2020 overturned a decision of the Reserve Bank of India (RBI) which prohibited Banks from dealing with Cryptocurrency exchanges, ruling that RBI cannot just curb trading of cryptocurrency through a circular - a law needs to be passed for this.


However, Cryptocurrency regulations are still prohibitory, besides being difficult to comprehend. The Government of India has been sceptical of Cryptocurrency, oscillating between wanting to regulate and banning Cryptocurrencies. Cryptocurrencies are not recognised as legal tender and though the exchanges are legal, the Government has made it very difficult for them to operate.


While the Government wishes to actively encourage Blockchain technology, it has been resisting the popular usage of Cryptocurrency. Once the unit of account(s) of these transactions change from INR to any Cryptocurrency (say, BTC), then the possibility of recovery of tax would become farcical.


A final decision in relation to the above is expected soon, considering the evidence to show that Cryptocurrencies have emerged as a hedge against the uncertainty raised by COVID-19. Several reports indicate that the Parliament is considering a Cryptocurrency bill. In India, the COVID-19 lockdown saw investors re-engage their interest in virtual currencies - enough to have the Income Tax authorities supposedly take a close look at Cryptocurrency exchanges and Crypto-investors.

HOW ARE BITCOINS TAXED IN INDIA?


While there may be a lack of clarity over the status of Cryptocurrencies in India, at the same time, the levy of tax on transactions cannot be explicitly ruled out.


Accordingly, seeing how the Bitcoins were obtained by the taxpayer, tax on Bitcoins may be considered as follows:



INCOME TAX

The Indian Income Tax Laws have always sought to tax ‘Income’ received, irrespective of the form in which it is received by the taxpayer.



A.BITCOIN MINING -


BITCOINS AS A CAPITAL ASSET

  • Bitcoins created by mining may be classified as self-generated Capital Assets.

  • Subsequent transfer of such Bitcoins would therefore give rise to ‘Capital Gains’. However, one may note that the Cost of Acquisition of such Bitcoins cannot be determined as it is a self-generated Asset.

  • Also, 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.

  • Thus, following the Supreme Court decision in the case of CIT v. B.C.Srinivasa Shetty [1961] 128 ITR 294 (SC), the Capital Gains computation mechanism fails and no Capital Gains tax would arise on the mining of Bitcoins.


BITCOINS AS INCOME FROM OTHER SOURCES:

  • Considering the ambiguity in the Indian Income Tax Laws, it is also possible to take a contrary view and tax the entire value of Bitcoins created by mining under the head ‘Income From Other Sources’.


B. BITCOIN WALLETS -


BITCOINS AS CONSIDERATION FOR SELLING GOODS AND / OR SERVICES:

  • Where Bitcoins are received as consideration for selling Goods and / or Services, it would constitute income in the hands of the Recipient. Such payments received in the ordinary course of Business or Profession would be taxed under the head ‘Profits and Gains from Business or Profession’.


BITCOINS HELD AS AN INVESTMENT:

  • If Bitcoins have been obtained, held as an Investment and then transferred in exchange for real currency, the appreciation in value may constitute income in the hands of the Crypto-investor.

Capital Gains


Galactic Advisors' view on the matter is that it would be classified under Income from Capital Gains.

Example 1

Ms. Krypto bought bitcoin on 5 February 2019 for USD 4,000 per Bitcoin. She bought 1.5 BTC in total (USD 6,000).

She sells 1 Bitcoin on 15 January 2021 for USD 40,000. She continues to hold 0.5 BTC.

Tax on this amount of INR 26.28 lakh would be payable at slab rates.

Example 2

Barney buys BTC for USD 3,000 per BTC on 1 January 2018. He buys 1.25 Bitcoin in total.

He sells:

0.25 BTC on 30 December 2020 at USD 35,000 per BTC and

1 BTC on 10 February 2021 at USD 38,000 per BTC

Rule 115 is used for conversion of Foreign currency earnings into INR.


Tax is payable as under:

  • Tax at slab rates on STCG of INR 5.92 lakh

  • Tax at 20% on LTCG of INR 25.9 lakh


Other Sources/ Business Income


Taxation of cryptocurrencies is a complex matter with no concrete judicial precedents. In the future, the Income Tax Department may classify this under Income from other sources or speculative business.



C. BITCOIN TRADING -


  • As mentioned earlier, Bitcoin trading is the act of Buying Low and Selling High. The income arising out of such Bitcoin trading activity, in the ordinary course, would give rise to income from Business or Capital Gains.

  • Accordingly, the Profits arising out of such Business would be subject to tax under the head ‘Profits and Gains from Business or Profession’ or under 'Capital Gains'.



GST


Recently, the Central Economic Intelligence Bureau (CEIB), an arm of the union finance ministry conducted a study on levying Goods and Services Tax (GST) on Cryptocurrencies. It put forward a proposal to impose 18% GST on Bitcoin transactions.


The CEIB informed the Central Board of Indirect Taxes and Customs (CBIC) that the Government could potentially gain INR 7,200 Crore annually on Bitcoin trading. It suggested that Bitcoins may be categorized under the 'Intangible Assets' class and be treated as ‘Current Assets’. Subsequently, GST could be levied on all transactions on the margins made while trading in Bitcoins.


In view of the above, the CBIC is mulling over preparing a detailed proposal to be put before the GST Council.



Planning on selling your bitcoin and not sure about tax implications? Feel free to contact us to optimize your taxes!

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