Bitcoin and other Cryptocurrencies Under Tax Radar

• Posted on Jan 2, 2018
• |
• By Dhruv

These days, “Cryptocurrency” has become a new buzz word for the entire world. Investors are simply smitten by cryptocurrencies such as Bitcoin and its massive growth rate. And investors are investing heavily in it to catch the growth bandwagon of such currency.

Now, Indian investors are not behind when it comes to investing in Bitcoin and other cryptocurrencies. And what has made Indian investors to invest heavily in cryptocurrencies is “Demonetisation” and “Digital India” drive. This two reason has made Indian investors to explore new vistas beyond the basic investment favorites such as “Gold” and “Share Market“.

To understand the tax implications of Cryptocurrencies in India, the following points need to be understood under the context of the Income Tax Act:

1) Business Income – Profits and Gains received from any business or profession carried on by the taxpayer in any financial year is called Business income.

2) Capital Gains – It means any income which has been derived from a ‘Capital Asset’ (whether movable or immovable)

3) Capital Asset – Any kind of property held owned by the taxpayer is considered as a capital asset. It doesn’t matter whether it is connected with business or profession.

Image showing taxability for bitcoin and any other cryptocurrency:

Sypnosis of the image showing the taxability bitcoin generation and bitcoin income:

⇒ Income from Bitcoin Mining:

Mining is the process of generating Bitcoin through a process of solving complex algorithms and thus by solving them creating a Bitcoin. The one who is mining receives bitcoin as a payment and there is no provisions in the current Indian taxation system to bring them under the purview. So as of now, Miners of bitcoins are somehow exempted from taxation purview but it in the near future, it will come under tax umbrella.

⇒ Selling or Purchasing on Bitcoin Exchanges (Bitcoin as Investment):

Selling or Purchasing on Bitcoin Exchanges is one of the simplest way to understand. However, the important aspect to be to be considered is whether the activity is to be considered as Investment or Trading. Now, here the question arises in the mind that whether to consider this as Investment or Trading. The answer to this question is simple, if the activity is considered as Investment, then the difference between the selling price and purchase price will be treated as Capital Gain and if the activity is considered as Trading, then the difference will be treated as Business Income, irrespective of the period of holding.

Now, if it is considered as an investment then a capital gain tax of 20% will be applicable to your gains if your investment period is more than 3 years. And if the investment period done by you is less than  3 years than any gains rendered by you is considered as your income and accordingly, it will charge for tax.

⇒ Selling or Purchasing on Bitcoin Exchanges (Bitcoin held 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.

⇒ Receiving payments in Bitcoins for Goods and Services:

If a business receives payment in Bitcoins for any goods or services provided, then, in that case, the market value of the cryptocurrency received as consideration for the goods and services provided will be considered as the consideration (i.e. Sale amount). Hence, the difference between the market value of the cryptocurrency and the cost of provision of goods and services will be considered as Business Income in the name of the taxpayer and the business income thus produced will be charged to tax at the applicable tax rate.

Currently, our Indian Tax laws do not have any specific detail on how to deal with cryptocurrencies and how it should be taxed in India. Up until now, RBI has not declared as legal tender and thus should be treated as an asset. It should be kept in the mind that the cryptocurrency market is unregulated, however not an illegal one.

• Posted on Jan 2, 2018
• |
• By Dhruv
• |
• 0 Comments