Tax on Bitcoins and other cryptocurrencies in India

tax on bitcoins

Firstly you might be wondering what is this all about. What are these crypto-currencies? What is Bitcoin? Will there be any tax on Bitcoins?

And the most important of all are they legal in India? How to buy Bitcoins in India?

Crypto-currencies usually termed as the future of monetary revolution operates virtually. These are the type of currencies that can be held by everyone irrespective of their country as no Government in the world controls them or is responsible for there creation and circulation.

Their transactions happen online through various trading platforms and apps. Created by miners spread across the world, one can invest in them, do transactions and keep them as assets through these online wallets.

Since it’s a decentralized system of monetary circulation mostly over peer-to-peer networks, no one can track the flow of money and then arises the problem of money laundering and other financial malpractices since one doesn’t have to pay taxes to anyone. Whatever one gets as profits from investments or receives from others as payments remain with them after paying just a little amount of transaction fees in most of the exchanges dealing in cryptos.

In India however, the Government is looking for ways to regulate the circulation of Bitcoin and other Crypto-currencies in the country and also put a tax on bitcoins and other such cryptocurrencies. This came as a notion to support the current BJP Government’s propaganda of curbing out corruption from the country as stated above since cryptos aren’t regulated by anyone the risk of various monetary crimes increases. Currently, the I-T Department has already served notices to lacs of people across the country who are either mining or dealing in cryptos seeking information about there transaction details, as well as they, are also keeping track of the daily transactions of individuals by obtaining data from various online exchanges operating in and outside India.

So let’s get started with understanding the Taxation scenario on crypto-currencies in India.

At first, we need to understand what comes under Income Tax.

  1. Business Income – These are the profits and gains received from any business or profession carried on by the taxpayer at any time during the    Financial Year. It includes ‘any’ compensation received or other payment due to be received. Further, the compensation may be received in Cash or Kind.
  2. Capital Gains – It means any income which has been derived from a ‘Capital Asset’ (whether movable or immovable)
  3. Capital Asset – It means property of any kind held by the taxpayer, whether or not connected with his business or profession.

However, this does not include any Stock in Trade.

Moving ahead with the possible scenarios now

Since the cryptocurrencies have not yet been declared as legal tender by the Reserve Bank of India, these cannot be considered as legal tender (cash) and shall be considered as an asset. With a general understanding of the above terms, we move on to understand how cryptocurrencies would be taxed under different scenarios:

Scenario 1: When a person receives Cryptocurrency as payment for rendering goods or services

If a provider of goods or services receives any payment by cryptocurrency, then, the fair market value of the cryptocurrency received as consideration for rendering the goods or services will be considered as the consideration (that is the sale amount). Hence, the difference between the Fair Market Value of the cryptocurrency and the cost of provision of goods or services will be treated as Business Income in the hands of the taxpayer and the resultant Business Income will be charged to tax at the applicable slab rate.

Refer the following example to understand the above more clearly:

Mr. A provides services for which he agrees to receive 2 Bitcoins.

For simplicity purpose, assume the cost of provision of service as Rs. 5,00,000/- and the Fair Market Value of 1 Bitcoin = Rs. 5,50,000/-.

Hence, by applying simple mathematics we can conclude that the total consideration for the services rendered is Rs. 11,00,000/- (5,50,000 X 2) and therefore the Business Income is Rs. 6,00,000/-

Moving ahead

Continuation of Scenario 1: The person receiving cryptocurrency as consideration sells the cryptocurrency

Now as soon as the person receives the cryptocurrency as consideration, it becomes his capital asset under the assumption that it is not Stock in Trade (which is discussed later). Therefore, as and when the person sells the cryptocurrency, the resultant difference between the Fair Market Value on the date of receipt of cryptocurrency (from the provision of goods or services) and the date of sale of cryptocurrency will be treated as Capital Gain.

Further, if the cryptocurrency is held for 36 months or less, it will be treated as Short Term Capital Gain. If it is held for more than 36 months it will be treated as Long Term Capital Gain.

While computing Long Term Capital Gain, the taxpayer will get the benefit of indexation.

The bifurcation of Short Term Capital Gain and Long-Term Capital Gain is important since the Short Term Capital Gains are taxed at Slab Rates and Long-Term Capital Gains are taxed @ 20%.

Let us continue the example taken in Scenario 1:

Suppose the bitcoins received by Mr. A is sold by him @ Rs. 5,75,000/- per Bitcoin then the value of the consideration that will be received by Mr. A is Rs. 11,50,000/-.

Hence, the Capital Gains would be Rs. 50,000/- (11,50,000 – 11,00,000) and depending on the period of holding of the cryptocurrency, it will be taxed as Short Term Capital Gain or Long Term Capital Gain.

Scenario 2: A person paying consideration by cryptocurrency for receiving any goods or services

If a person availing any goods or currency pays consideration in the form of cryptocurrency, then in such a case there will be aspects which will need to be considered:

Capital Gains:- The Capital Gains will be determined in the same manner as discussed in ‘continuation of scenario 1’ and will be taxed accordingly. However, in this case, the relevant dates for determination of period of holding shall be the date of acquisition of the currency and the date of payment

Amount (Quantification) of the expense:- The amount of expense shall be the Fair Market Value of the cryptocurrency on the date of payment.

To understand these two let us take this example

Suppose Mr. A avails goods worth Rs. 11,50,000/- the payment for which is discharged by paying 2 Bitcoins (5,75,000 X 2).

Assuming the cost of acquisition of 2 Bitcoins to be Rs. 10,00,000/- (5,00,000 X 2), the resultant Capital Gain will be Rs. 1,50,000/- and will be taxed as Short Term Capital Gain or Long-Term Capital Gain depending on the period of holding.

The amount of expenditure will be the Fair Market Value of the Bitcoins that is Rs. 11,50,000/-

Scenario 3: A person Investing / Trading in cryptocurrency

This is the simplest to understand. However, the important aspect to be to be considered is whether the activity is to be considered as Investment or Trading.

If the activity is considered as Investment the difference between the sale price and purchase price will be treated as Capital Gains (the treatment will be as discussed earlier) and on the contrary, if the activity is considered as Trading, the difference will be treated as Business Income irrespective of the period of holding.

Determining whether the difference will be considered as Capital Gains or Business Income will depend solely upon the intention of the person at the time of acquisition of the cryptocurrency.

Finally the concluding part and answer regarding the legality of Bitcoins and other crypto-currencies in India.

Currently, Indian Tax laws do not have a specific mention on how cryptocurrencies are to be taxed in India and still remains a grey area, particularly as the exposure of people increases until a specific mention in the law is made.

The cryptocurrencies are not declared as legal tender by the RBI and hence shall be treated as an asset.

Further, it shall be kept in mind that the cryptocurrency market is an unregulated market however not an illegal one.

Want to get started with Bitcoin ?? Here’s the complete guide to Buy Bitcoins in India.

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