Income Tax On Bitcoin And Its Legality In India

Bitcoins are one of the most popular cryptocurrencies. All the crypto-currencies are considered as Virtual Digital Assets for Income Tax purposes. There are separate provisions in the act dealing with the taxation of these Virtual Digital Assets (VDA). Crypto-currencies are taxed at a flat rate of 30% at the time of their sale.

Cost incurred to purchase can be claimed as a deduction, and no deductions can be claimed apart from that. Essentially, income from Virtual Digital Assets are treated as capital gains. 

Apart from sale, there is also bitcoin mining, airdrops and gifting of crypto currency, and the tax implications are not similar for all of them. This article explains in detail the tax treatment of bitcoins on each type of activity.

What is Bitcoin?

• Bitcoin is one of the earliest forms of cryptocurrency, forming part of the worldwide peer-to-peer payment system. 
• Subsequently, there has been a rapid increase in the number of cryptocurrencies that have been created, some of which are Litecoin, Ethereum, Zcash, Dash, Ripple etc. 
• Bitcoins, in India, have slowly started gaining popularity, given the government’s efforts to move towards a cashless economy.
• They are not centrally administered or regulated by any specific body like the RBI, which administers physical currency in India.
• Peer-to-peer transactions with bitcoins are managed using blockchain technology which serves as a public ledger for all transactions.

Meaning of Cryptocurrency

• Cryptocurrency is digital money that is considered to be more secure than real money. Cryptocurrency uses something called cryptography to secure its transactions. 
• Cryptography, is a method of converting comprehensible data into complicated codes which are tough to crack. 
• Cryptocurrencies are classified as a subset of digital currencies, alternative currencies and virtual currencies.

Bitcoin Mining Explained 

One can obtain bitcoins either by :

Mining

Mining is an activity where an individual (called the “miner”) uses his computer prowess to crack computationally difficult puzzles. The process of cracking such puzzles, which is integral to blockchain technology, helps maintain it. As a reward for this, the miner gets new bitcoins, which is nothing but the creation of a bitcoin or mining.

Buying Bitcoin With Fiat Currency 

Everyone cannot be a Bitcoin miner. Hence, you can consider buying bitcoins from bitcoin exchanges and storing them in an online bitcoin wallet in digital form. Unicorn, Bitxoxo, Zebpay, Coinbase etc., are some of the bitcoin exchanges present in India. Such bitcoins would be purchased in consideration of real(fiat) currency.

It would be interesting to note that the value of one bitcoin is approximately INR 58,86,000  (as of March 31, 2024).

Accepting Bitcoins For Goods And Services

Though this may not be a common phenomenon in India currently, a few savvy businessmen accept bitcoins (instead of real currency) for the sale of goods or services they deal in.

Is Bitcoin Legal In India?

• For now, there is no law in India that specifically bans the bitcoin transactions in India.
• Though transactions in bitcoins are taxed under the Income Tax Act, the transactions are not regulated by any legal body in India.
• So, it can be concluded that though crypto trading is legal, it lacks regulations and non-delivery cannot be sued in any court of law.
• The Finance Ministry has repeatedly pronounced that Bitcoin or other cryptocurrencies are not legal tender in a press conference. Thus, such crypto can be considered an asset instead of calling it a currency.

How Are Bitcoins Taxed In India?

The Finance Act 2022 introduced Section 115BBH, which imposes a levy on income earned from trading in Bitcoin, Virtual digital assets, and cryptocurrencies.

Union Budget 2022 has also clarified on following points :

• The government officially categorised digital assets, including crypto assets, as “Virtual Digital Assets”. Income from the transfer of virtual digital assets such as crypto and NFTs will be taxed at 30%.
• No deduction, except the cost of acquisition, will be allowed while reporting income from the transfer of digital assets.
• Loss from digital assets cannot be set off or carried forward of loss against any other income.
• Gifting digital assets will attract tax in the receiver's hands. Losses incurred from one virtual digital currency cannot be set off against income from another digital currency.
• From 1 July 2022, 1% TDS will apply to all sell transactions of Virtual Digital Assets (VDAs), including cryptocurrencies and NFTs. 

Scenario A: Bitcoin Mining

• In a blockchain network, transactions are verified by a group of nodes or computers, called miners, who compete to solve complex mathematical puzzles. 
• The first miner to solve the puzzle is rewarded with a certain amount of cryptocurrency, which varies depending on the network.
• Mining income received will be taxed at a flat 30%. 
• The cost of acquisition for the crypto mining will be considered as ‘Zero’ for computing the gains at the time of sale. 
• No expenses such as electricity cost or infra cost can be included in the cost of acquisition.

Scenario B: Bitcoins Held As An Investment Being Transferred In Exchange For Real Currency

Bitcoins which are held as investments, are considered to be capital assets, and thus as per section 115BBH  30% levy is imposed on the gains made in such assets.

Gains from such assets will be computed under Capital gains 

A simple example is given below to understand this :

Scenario C: Bitcoins Held As Stock-in-trade Being Transferred In Exchange For Real Currency

• The income arising out of bitcoin trading activity would give rise to income from business, and accordingly, the profits arising out of such business will be considered under “Income from Business and Profession”.
• In Schedule VDA of Income tax form, you will have to select the nature of Income accordingly.
• As per Section 115BBH, a 30% tax will be levied without any deduction for expenses incurred other than the direct cost of acquisition.

Scenario D: Bitcoins Being Received As Consideration On Sale Of Goods And Services

• Newly enacted section 115BBH does not specify the tax treatment if you receive the Bitcoin or other VDA in exchange for the sale of goods or services specifically. However, the Receipt of Bitcoin or VDA in exchange for the sale of goods or services can be treated as follows. 
• The fair value of bitcoin received at the time of receipt for the sale of goods and services can be considered a receipt against the rendering of such services. Such Sale of Goods or services will be considered Income from Business and profession.
• Subsequent sales of such Bitcoin or VDA will give rise to capital gain or loss and can be declared accordingly.

For example, Mr. A Freelancer invoices Rs 10 lakhs to his customer. Such customers send Rs. 10 lakhs worth of Bitcoin ( 0.2 BTC) in exchange for their service. Subsequently, Mr A sold such Bitcoin for Rs 11 lakhs after a few days and withdrew the amount to his bank account. Now, tax computation can be done as follows;

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