Taxation of Bitcoins

Where does bitcoin come from or how is it generated?

One can obtain bitcoins either by :

• Mining
  Bitcoin Mining is a peer to peer computer process used to secure and verify bitcoin transactions. Verification of transactions is through resource-intensive and difficult tasks like cracking difficult puzzles. The process of cracking such puzzles are an integral to the blockchain technology and helps in maintaining them. As a reward for this, the miner gets new bitcoins which is nothing but creation of a bitcoin or mining.
• Purchasing them from a bitcoin exchange against another currency
  Everyone cannot be a bitcoin miner. Hence, one has the option to buy bitcoins from bitcoin exchanges. Bitcoins purchased through exchanges are stored in an online wallet in digital form. Unicorn, Zebpay, Coinbase are some of the bitcoin exchanges presently in India. Such bitcoins would be purchased in consideration for real currency.
• Receiving bitcoins in consideration of selling goods and services

Are bitcoins legal in India?

Bitcoins are a medium of payment. They are neither authorized nor regulated by any central authority in India. Further, no set rules, regulations or guidelines have been laid down. So there are no means for resolving disputes that could arise while dealing with bitcoins. Hence, bitcoin transactions come with their own set of risks. However, given this background, one cannot conclude that bitcoins are illegal as, so far, there has been no ban on bitcoins in India.

Presently, this may not be a common phenomenon in India. However, there are few savvy businessmen who accept bitcoins on sale of goods or services.

How are bitcoins taxed in India?

Taxation of Bitcoins in India – The concept of cryptocurrencies and bitcoins is quite new in India. As such, there is no specific tax treatment for cryptocurrency transactions in India. The government also has not yet brought their taxability into the statute books. At any rate, it cannot be said that the cryptocurrency transactions cannot be taxed in India. Therefore, considering the different tax treatments of cryptocurrency and bitcoin transactions is necessary.

Scenario 1 – Taxation of Bitcoins – Bitcoin Mining

Bitcoins created by mining are capital assets. However, these bitcoins are self-generated assets. Subsequent sale of such bitcoins would, usually, give rise to capital gains. However, one may note that determining the Cost of Acquisition(COA) of a self generated assets is not possible. COA of a bitcoin, being a self-generated asset, cannot be determined. Further, section 55 of the Income Tax Act defines COA as nil or zero value as COA for a few self generated assets. However. Bitcoins , as of now, are not covered under section 55. Therefore, as per the Supreme Court decision in the case of B.C.Srinivasa Shetty, the capital gains computation mechanism fails. Hence, no capital gains tax would arise on mining of bitcoins. That is until the rules and regulations aren’t updated. At this point of time, the Indian tax laws are quite silent on taxability of cryptocurrencies. It is possible for income tax authorities to have a contrary view on the taxation of bitcoins and other cryptocurrencies. It is possible the cryptocurrencies arent considered as capital assets at all. Or that transactions in cryptocurrencies may all be considered speculative in nature.

Scenario 2 – Taxation of Bitcoins – Bitcoins held as an investment and transfer in exchange for real currency

Bitcoins may be held for trading or as investments. If bitcoins, are help as an investment, they will be capital assets. And transfer of these capital assets in exchange for real currency may result in a gain or a loss. This gain or loss forms part of the taxable income. An appreciation in value would give rise to a long term capital gain or a short term capital gain. This entirely depends on the period of holding of the bitcoin. Further, tax on long term gains at a flat rate of 20% while short term gains would be taxed at the individual slab rate. The knowledge of cost of acquisition (COA) is necessary for computing capital gains. For arriving at long term capital gains, COA will be determined after giving the benefit of indexation.

There is a possibility that the IT authorities may not consider Bitcoins as a capital asset. Accordingly the provisions of capital gains may not apply. Hence, the income tax authorities may choose to tax the gains from bitcoins under other heads of income. Further, if the income gets taxed under other heads, the taxpayer would have to pay taxes according to the tax slabs. The benefit of indexation would only be available if such transactions are taxed under capital gains, and would not be available if taxed under other heads.

Scenario 3 – Taxation of Bitcoins – Bitcoins held as stock-in-trade and exchanged for real currency

It is also possible to hold bitcoins as stock in trade. The income arising out of bitcoins trading activity would give rise to income from business. and accordingly, the profits arising out of such business would be subject to tax as per the individual slab rates.

Scenario 4 – Taxation of Bitcoins – Bitcoins received as consideration on sale of goods and services

Using bitcoins as a substitute for money is more than possible. Bitcoins received in an exchange for goods or services shall be treated on par with receipt of money. It would constitute income in the hands of the recipient. Bitcoins received may be considered as income from business or profession. Further, it’ll be taxed, normally, under the head of profits or gains from business or profession. At present, there are no separate reporting requirements for transactions in bitcoins.

Scenario 5 – Taxation of Bitcoins – crypto-to-crypto transactions

Crypto to crypto transactions may also be taxable. Example, you use your bitcoin to buy rival ethereum. In this instant case, there is a transfer of one cyrptocurrency for another. Any gain in such a transaction may be taxed. 

Scenario 6 – Taxation of Bitcoins – Gifting of cryptocurrency

There are no specific rules or regulations for bitcoins currently. We’ll have to rely on the gifting rules of the Income Tax act for taxation of bitcoins in this case. On a reading of Section 56, note that crytocurrency received as a gift from relatives should be exempted.

Scenario 7 – Taxation of Bitcoins – Payment of Salary/remuneration through Bitcoins

Using Bitcoins and other cryptocurrency as a substitue for money is possible now. Though it may not seem logical now but in the near future it is more than possible. In such a case, the receipt of cryptocurrency in the hands of the recipient will be liable for taxation. Taxation of bitcoins will be done under the head of Income from Salary in this case.

Conclusion on Taxation of Bitcoins in India –

At a basic level, cryptocurrencies constitute property under the Income Tax Act. As such, transactions of cryptocurrencies generally lead to income tax consequences. If a transacting taxpayer holds cryptocurrency for long-term investment purposes (ie, as a capital asset), a capital gain or loss usually arises. If held as a part of an business, whether active or as a one-off venture to make a profit, any gain would ordinarily be taxable as business income. In either case, the gain would be generally computed as the difference between the cryptocurrency’s sale price and its original acquisition cost.

The government’s position is clear on cryptocurrencies and bitcoins. They aren’t recognised as legal currency as of now .  However, the Government is sure to come up with rules and regulations considering the rise in the acceptance and transactions of bitcoins. This may also help in clearing any ambiguity of bitcoins and taxation of bitcoins and other cryptocurrencies.