BitCoin Taxation in India: Bitcoin is an innovative payment network and a new kind of money. Bitcoin offers the promise of lower transaction fees than traditional online payment mechanisms and is operated by a decentralized authority, unlike government issued currencies. Bitcoin uses peer-to-peer technology to operate with no central authority or banks; managing transactions and the issuing of bitcoins is carried out collectively by the network. Bitcoin is open-source; its design is public, nobody owns or controls Bitcoin and everyone can take part. Through many of its unique properties, Bitcoin allows exciting uses that could not be covered by any previous payment system.
- A distributed, decentralized digital currency system
- Released by Satoshi Nakamoto in 2008 .
- Effectively a bank run by an ad hoc network
- Digital checks
- A distributed transaction log
What is BitCoin
- First ‘decentralized’ digital currency. They are digital coins you can send through the internet.
- No one controls it. Bitcoins aren’t printed, like rupee or dollars – they’re produced by people, and increasingly businesses, running computers all around the world, using software that solves mathematical problems.
- An anonymous software developer called Satoshi Nakamoto proposed bitcoin in 2009, which was an electronic payment system based on mathematical proof. The idea was to produce a currency independent of any central authority, transferable electronically, more or less instantly, with very low transaction fees.
- In simple words, bitcoin is an open source software to transfer money over the internet.
Adopting blockchain technology will enhance settlement at lower costs as also lower the risk of the happening of fraud.
Size of the BitCoin Economy
- Number of BitCoins in circulation 11.8 million (December 2013)
- Total number of BitCoins generated cannot exceed 21 million
- Average price of a Bitcoin:
- 2017-January – $1000
- 2017-December- $17000
BitCoin RBI Warnings
- RBI hasn’t authorised any entity or company to deal with Bitcoin or any other virtual currency in India
- Bitcoin is prone to hacking and malware attacks
- There’s no legal recourse for any case of Bitcoin fraud
- Bitcoin value is based on ‘speculation’
- Bitcoin exchange platforms are set up in jurisdictions whose legal status is unclear.
- Bitcoins are used for illegal and terrorism activities.
- RBI has constituted a group to look at the possibility of having a government-backed cryptocurrency.
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, the cost of acquisition of a bitcoin cannot be determined as it is a self-generated asset. Further, it also 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 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.
Scenario B : BitCoins held as an Investment
- 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.
Scenario B : BitCoins 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.
Author – By Sourabh Agrawal (Tax Consultant)