In the Indian context, a market far from ripe for cryptocurrencies, is just as
unpredictable as its legal framework is. The same uncertainty carries forward to
the tax statutes that are supposed to govern cryptocurrency. Nobody can
discriminatively say if the lack of legal analysis in India on a spontaneously
growing market of cryptocurrencies is due to the banks being insecure of a
decentralised system or the sheer complexities of incorporating them in the law.
This paper analyses the current position of statutes, especially concerning
taxation over cryptocurrency. It then attempts to analyse how crypto should be
segregated so as to tax it in accordance with the appropriate slab, additionally
what is the position of law on the taxability of profits made from selling
crypto. Further, it goes over regulatory obstructions and attempts to present
proposals and suggestions to overcome the same.
Current Legal Scenario
In its policy to tax profits on crypto by classifying them as capital gains, it
would seem that India has adopted an approach similar to that of the UK1 ,
however, in its potential policy of banning pre-existing cryptocurrencies to
introduce a state backed digital currency for it to be ultimately regulated by
the RBI is similar to that of China.
It would be noteworthy that regulations in the domain of cryptocurrency
exchanges have progressively become controlling to the extent of The Reserve
Bank of India banning financial institutions from indulging in transactions with
cryptocurrency; with much needed judicial intervention, the said ban was lifted
by the Apex Court in Cryptocurrency v. RBI2, providing a necessary relief.
was held that the RBI has failed to depict any damage to banks or similarly
regulated entities, caused by trading of cryptocurrency and that in the
latter's functioning, the 'banking system was the lifeline' for trading. Post
judgement, there have been demands from the industry leaders of cryptocurrency,
for it to be included in the RBI's regulatory sandbox.3
The lack of regulation has subjected the world of cryptocurrency to transform
into means of money laundering. However, the Central Economic Intelligence
Bureau has suggested the bitcoin would be classified as an 'intangible asset'
and GST would be levied on it accordingly. CEIB has proposed to levy 18% GST on
transactions, which could amount to roughly 40,000 crores of revenue annually.4
In India, there is no definition of currency or virtual currency per se; neither
can the latter be read into the definition of foreign currency.5 The Apex court
has affirmed the view that cryptocurrency cannot fall under the ambit of this
act in TCS v. State of AP
6 and Shankara Rao Badam & Ors. v. State of Mysore &
, 2002 178 ELT 22 S.C.
Therefore, as of now, Bitcoin operates as an asset in India, i.e., a store of
value which when sold, incurs capital gains that can be taxed. However, Bitcoin,
being a cryptocurrency can be used as a medium of exchange as well, thereby
bearing the charge of indirect goods tax as well, consequently creating the
double taxation problem.7
Taxation of Crypto Worldwide
Crypto taxation is very dependent on the legal classification of digital
currency as an asset, currency, commodity, property, and so on in the nation in
question, and also the tax structure in place. Most nations impose wealth tax,
CGT or income tax.
- Germany has been labeled a "crypto tax haven." because it does not recognise cryptocurrency
as a monetary currency, stock or commodity. Crypto, on the other hand, is deemed
private money. This difference is critical since private sales in Germany result
in tax benefits. Private sales with a value of less than Euros 600 are tax-free.
- In the US gains or losses on crypto assets kept for less than a year are taxed
at the greatest marginal tax rate available to your taxable income. Any losses
could be used to offset up to $3,000 overall in income tax. Any further losses
can be carried to the following year. If the cryptocurrency is held for longer
than a year, the relevant tax rate is significantly lower, varying from 0% to
15% to 20%, based on the individual or joint marital income.
are classified as legal property in Australia, making them liable to capital
- The Netherlands tax regime is distinct from the Commonwealth
nations. Instead of a capital gains tax, it imposes a wealth tax.
- Bitcoin and
other cryptocurrencies are legal in Canada. You may buy items and services using
digital currencies on the Internet and at businesses that accept them. Based on
the type of the trading operations, crypto is subject to either CGT or income
tax in Canada. If the income is earned from a business, the entire amount is
taxed, however capital gains are only taxed 50% of the time.
- Japan adopts a
proactive stance on cryptocurrency rules, acknowledging cryptocurrencies as
legal assets. Japan considers bitcoin trading earnings to be "miscellaneous
income" and taxes traders accordingly.
- Since long-term capital gains really
aren't taxed, Singapore is known as a bitcoin safe haven. Companies that
routinely deal in cryptocurrencies, on the other hand, are subject to taxation,
with gains being treated as income. � China has banned crypto exchanges and
bitcoin mining in the nation.8
The views of the Chairman of the Central Board of Direct Taxation are in
consonance with multiple officials from the income tax department when they say
that for individuals to be liable to pay taxes on cryptocurrency, it should be
treated as a part of capital gains.9
In common parlance around income tax, the tax structure enforced on
cryptocurrency ideally depends on the nature of its investment, i.e., whether
the same is in the form of an asset or currency. However, the distinction lies
wherein if cryptocurrencies are traded frequently as a business income, then the
profit gained on the same can be taxed according to the respective slab rate but
if it is held for investment purposes then the tax rate can be applied on profit
in the form of capital gains.
Further, if an individual uses their investment
within a span of 3 years, then the relevant tax slab would be applied on the
profit in accordance of it being a short-term capital gain but if the taxpayer
redeems their investment after a span of 3 years, then the profit can be
regarded as a long-term capital gain and therefore will be taxed at 20% with
Ideally the process of mining cryptocurrency is considered as a
taxable event, and the same generated by the process of mining can be considered
as a self-generated capital asset. However, this asset cannot be taxed as
capital gain because in India �55 of the I-T Act11 does not recognise it as
such. Specifically for mining if the taxpayer runs in mining business, then they
can avail business deduction on their tax bill in lieu of the resources utilised
in the process of mining, and such relaxations cannot be availed if mining
cryptocurrency has been done in furtherance of personal gain.12
Particularly Bitcoin, being a self-generating asset like other cryptocurrencies, cannot be
evaluated for a definite cost of acquisition hence the mechanism of computing
capital gains on the same fails as supported by the decision of the Supreme
Court in the case of BC Srinivasa Setty.13
Since as of now the Indian tax laws
are completely silent on the taxability of bitcoins it would be safe to assume
that the income tax authorities would opt for taxing the value of crypto
currency generated via mining under the head of 'income from other sources'.14
Crypto as Stock:
If the activity of trading crypto currency generates income
as part of a business model, then the profits made by such business would be
subject to tax according to relevant slab rates.15
Crypto as Consideration/Compensation:
If crypto currency or specifically bitcoin is exchanged for goods in a transaction then it shall be treated on par
with the receipt of actual money and would make a part of the recipient's net
income, consequently they would be taxed normally under the category of profits
Disclosure of Income from Crypto:
Taxpayers with the income exceeding
50,00,000 rupees per annum are mandated to disclose their assets and liabilities
in the schedule to assets and liabilities accompanied by the cost of
acquisition; this is inclusive of crypto currencies since for the purpose of
disclosure of income they are considered as assets.
In his budget speech in the
budget of 2018 Mr Arun Jaitley stated that 'The Government does not consider
crypto-currencies as legal tender or coin and shall take all possible steps to
eliminate the use of crypto assets practiced in financing illegitimate
activities as well as eradicate them from being a part of the payment system.
However, it will explore use of blockchain technology proactively for
effectively ushering in a digital economy and will soon dispel the ambiguity
around the taxability, legality and disclosure mandates in the domain of
Liability Depending on How the Crypto was Held:
According to �2 of the I-T Act 17 , any property held by a person regardless of
it being connected to their business or profession shall be classified as a
capital asset. As explained above, in the case of virtual assets such as cryptocurrency, the income
generated from the investment shall be counted as capital gains but can be filed
under income from other sources as well, meaning for the purpose of tax
calculation the duration for which crypto currency was held by the taxpayer will
be factored in.
Tax and Regulatory Difficulties
- Till now, the RBI has not declared bitcoins or other cryptocurrencies as a
formally approved currency, and this seems to be a remote possibility. Fiat
currencies are often backed by governmental bodies or central banks and are
secured by assets like gold that are held by the issuing institution. Bitcoin
generated by the blockchain technology doesn't really satisfy those
requirements. If bitcoin had been categorised as currency, it would have been
instantly exempted from GST because the term "goods'' does not cover currency.
- Property of any type which is movable in nature qualifies as a good
under the Sale of Goods Act of 1930 if it is sold in exchange of monetary
consideration. Hence, bitcoins are goods as per this statute only in transactions of fiat to
crypto or crypto to fiat. Barter exchanges are not authorised which will in
theory cover all transactions of crypto to crypto. Using the same reasoning, a
person purchasing other products using crypto would not be included as per the
Sale of Goods Act, 1930.
- Since the scope of "goods" is broad enough to include intangible
property such as cryptocurrencies, GST must also apply to cryptocurrency trades. If bitcoin is
sold for fiat money in such a case, there is a single supply which should be
subjected to GST. When bitcoin is exchanged for another product, it should be
regarded as a barter or, more accurately, two supplies happening simultaneously,
leading to two GST payments causing a severe GST effect.
- The Income Tax Act, 1961 defines capital assets as any property of any
sort, which is likely to include bitcoins. The issue then becomes whether bitcoins may
be classified as a stock-in-trade or capital asset. Judging by past explanations
by the Central Board of Direct Taxes about the categorisation of shares as
stock-in-trade or capital assets, it might be plausible to consider a bitcoin
sold by a normal customer to be a capital asset, while a crypto trader may
classify it as stock in trade. When it is classified as stock-in-trade, taxes on
the amount received will be due under the heading of business income.
If bitcoin is supplied by a customer but not during the course of business
operations, such as to purchase coffee, it should not be considered a taxable
supply as per GST.
- Individuals, particularly those who purchased bitcoins with cash in the early
days of bitcoin or NRIs, are at greater risk of being examined. There is no need
for an NRI who holds bitcoins outside of India to declare their ownership in
India. If an NRI receives money from the sale of crypto in India, then only he
or she is required to report it and pay taxes. Nevertheless, if an NRI sells
bitcoins outside of India and then tries to send the money back to India, it
would be carefully examined since they would have mostly earned significant
profits. Income tax authorities might issue notices, inquiring about the source
of income or wealth and demanding evidence that it is not hidden or black money.
This may be a major issue since proving how bitcoins were obtained in the early
years of the ecosystem can be challenging at times. It's also difficult to prove
that the bitcoin was purchased outside of India since it's a location-less
asset, with the closest estimate to a location being the wallet in which it was
kept at the time of purchase. However, it's likely that customers are unaware of
the location of the server where the wallet is stored, which may result in
- Likewise, resident Indians who've already purchased bitcoins outside of India
are required to report foreign assets and funds in foreign banks. Even for
legitimate users, the concerns identified with regard to source of money and
asset location may continue to be complex challenges. In the event that they
make a mistake, the consequences could be severe.
- Since utility tokens indicate a claim for movable goods or services,
they may not be taxed under GST, which excludes actionable claims under GST except for
gambling, betting, and lottery. When such tokens do not constitute an actionable
claim, then perhaps the point of taxing is moved to the time when the token is
actually swapped for services or commodities.
- If the RBI imposes a ban, it will be impossible to implement in reality
since the consumers will lose value, exchanges will lose business,
government will lose revenue, and transactions would most likely shift
overseas or underground. All parties are losing in this scenario, and now
the only way ahead is to acknowledge the problems in the present approach
and take appropriate measures to govern cryptocurrencies in India.18
The Government of India has stated several times that cryptocurrency-related
earnings will be taxed based on the method of the cryptocurrency being held. On
crucial issues like what will be the initial tax event and the valuation
process, as well as who must be responsible for reporting cryptocurrency trades,
a precise road map and formal instructions are eagerly expected.
The Income tax
authorities have delivered letters to cryptocurrency investors and exchanges in
past years, requesting information about their bitcoin operations. As a result,
it would be interesting to observe how the Indian government implements crypto
legislation. If properly regulated, this asset class might provide significant
tax income for the government, which could be utilised to support the country's
- (Yadav, Aman, Cryptocurrency in India: to Ban or not to Ban (March 2,
2021). Aman Kumar Yadav, 'Cryptocurrency in India: To ban or not to ban'
(The RMLNLU Law Review Blog, 2 March 2021), available at: https://rmlnlulawreview.com/2021/03/02/cryptocurrency-in-india-to-ban-or-not-to-ban,
Available at SSRN: https://ssrn.com/abstract=3803471
- Internet and Mobile Association of India v. Reserve Bank of India, Writ
Petition (Civil) No.528 of 2018
- Foreign Exchange Management Act 1999, s 2,
- S.B. Sinha, J. in Tata Consultancy Services v. State of Andhra Pradesh,
271 ITR 401 (2004)
- Australian Taxation Office, GST � removing the double taxation of
digital currency QC 54210, 3rd Nov. 2017
- Smith T, 'Cryptocurrency Regulations Around The World' (Investopedia,
- TimesofIndia, 'Those who have earned from Bitcoin will be taxed: CBDT
Chairman' (The Times of India, 6 February 2018
- Amit Gupta, 'Investing in cryptocurrencies? Know the tax implications'
(The Economic Times, 4 July 2021)
- The Income-Tax Act, 1961
- Supra, note 10.
- Commissioner of Income Tax v. B. C. Srinivasa Setty, (1981) 2 SCC 460
- Clear, 'Income tax on Bitcoin & its legality in India' (ClearTax, 21
- Nishchal Joshipura and Meyyappan Nagappan, 'Crypto-currencies-
Regulatory and Tax Issues'  CTCITJ. I (4) The Chamber's International
Tax Journal 86-90.