The concept of bitcoins is quite new to the Indian market, apparently, the government has not yet brought the taxability of bitcoins into the statute books. At the same time, the levy of tax on bitcoins cannot be ruled out because the Indian income tax laws have always sought to tax income received irrespective of the form in which it is received. Therefore, the possibility of tax on bitcoins can be looked at under the following circumstances:
Scenario A: Bitcoin Mining
Bitcoins created by mining are self-generated capital assets. Subsequent sale of such bitcoins would, in the ordinary course, give rise to capital gains. However, one may note that 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. Therefore, 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. This position would hold till such time the government thinks of coming up with an amendment to Section 55 of the Act. At this juncture, given that the Indian tax laws are silent on the taxability of bitcoins completely, we thought it right to comment on a probable contrary view by the income tax authorities. 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. Accordingly, the income tax authorities may choose to tax the value of bitcoins received from mining under the head “Income from other sources”
Scenario B: Bitcoins held as an investment being transferred in exchange for real currency.
If bitcoins, which are capital assets, have been held as an investment and are transferred in exchange for real currency, the appreciation in value would give rise to a long-term capital gain or a short-term capital gain depending on the period of holding of the bitcoin. Further, long-term gains would be taxed at a flat rate of 20% while short-term gains would be taxed at the individual slab rate. The cost of acquisition for arriving at long-term capital gains will be determined after giving the benefit of indexation. A simple example is given below to understand this :
Particulars Value in INR (Only hypothetical)
No. of bitcoins purchased 10
INR equivalent of 1 bitcoin at the time of purchase 4000 INR
Value of bitcoins (A) - 40,000 INR
INR equivalent of 1 bitcoin on the date of transfer - 5000 INR
Value of bitcoins (B) - 2,00,000
Capital gains (B - A) - 1,60,000 INR
Reiterating the probable contrary view of the income tax authorities discussed under Point 1 above, the IT authorities may not consider Bitcoins as a capital asset, and hence the provisions of capital gains would not apply. Accordingly, the income tax authorities may choose to tax the gains from bitcoins under the head “Income from other sources”. Further, if the income gets taxed under “Income from other sources”, the taxpayer would have to pay taxes at a rate as applicable to the tax slab he falls under. For eg, if his taxable income exceeds Rs 10 lakh, he would be liable to a tax @ 30% as against the flat rate of tax of 20% he would be liable to pay if charged to tax under long-term capital gains. The benefit of indexation as would be available if taxed under capital gains, would also not be available if taxed under Income from other sources.
Scenario C: Bitcoins held as stock-in-trade being transferred in exchange for real currency
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 D: Bitcoins being received as consideration on sale of goods and services
Bitcoins being received so shall be treated on par with receipt of money. It would 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. As regards the disclosure requirement of bitcoins in the income tax return forms, there continues to be a lack of clarity. In the budget 2018, our Finance Minister, Mr. Arun Jaitley, has stated in the budget speech, “112. Distributed ledger system or blockchain technology allows the organization of any chain of records or transactions without the need for intermediaries. The Government does not consider crypto-currencies legal tender or coin and will take all measures to eliminate the use of these crypto-assets in financing illegitimate activities or as part of the payment system. The Government will explore the use of blockchain technology proactively for ushering in the digital economy.” Further, the Central Bank also has chosen to reinforce its earlier message to “users, holders and traders of Virtual Currencies (“VCs”) including bitcoins regarding the potential economic, financial, operational, legal, customer protection and security related risks associated in dealing with such VCs.” Therefore, considering that bitcoin transactions are gradually 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 dispel the ambiguity around the legality of bitcoins, their taxability, and disclosure requirement of bitcoins. While this article aims at discussing the taxability of Bitcoins only, the tax treatment on transacting with other cryptocurrencies would also be similar to that in the case of Bitcoins.