Investment in crypto currency is neither explicitly legalized nor prohibited in India.

An RBI ban on crypto payments in 2018 was overturned by the Supreme Court in March.

Media reports said a draft bill banning all crypto currencies was in the works in 2019, but has yet to be tabled in the Parliament.

The Central Economic Intelligence Bureau (CEIB), an arm of the union finance ministry has put forward a proposal to impose 18 per cent GST on Bitcoin transactions. The CEIB told the Central Board of Indirect Taxes & Customs (CBIC) that Government could potentially gain Rs 7,200 Cr annually on Bitcoin trading.

Bitcoins created by mining

Are self-generated capital assets. Subsequent sale of such Bitcoins would, in the ordinary course of business, give rise to capital gains. However, one may note that the cost of acquisition of a Bitcoin cannot be readily 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.

Currently this leads to no capital gains tax arising on the mining of bitcoins.

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.

Bitcoins being received

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. 

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.

Ashutosh Gedamkar

Account Manager India
agedamkar@tvmarkets.com