Where did Bitcoin originate from, or how is it generated?

Here are different ways to obtain or generate bitcoins in India.

  • Mining Mining is an activity in which a person (referred to as a "miner") uses his computer skills to solve computationally challenging maths puzzles. The process of solving such problems, which are fundamental to blockchain technology, aids in its maintenance. The miner is rewarded with fresh bitcoins as a result of this, which is nothing more than bitcoin generation or mining.
  • Purchasing against real currency Bitcoin mining is not for everyone. Therefore, one may consider purchasing bitcoins from bitcoin exchanges and storing them in a digital bitcoin wallet. Unicorn, Bitxoxo, Zebpay, Coinbase, and more bitcoin exchanges are currently available in India. These bitcoins are purchased in exchange for real money. The current value of one bitcoin is around Rs 22,90,111.92
  • Receiving against selling goods or services Although this is not common in India, few businesses accept bitcoins, instead of real money, for the sale of goods or services.

How is Bitcoin taxed in India?

According to section 5 of the income tax act 1961, any income derived by an individual during a financial year, irrespective of its source and legal status, will be considered under ‘Total Earnings’. These earnings are taxable under the law subject to different taxation rules. So, any income derived from cryptocurrency-related activities will be included under total earnings and taxed accordingly.

The government does not maintain any database regarding crypto-trading by Indians at present. But, there are some ambiguous theories on bitcoin taxation in India. So, let’s deep dive into them one-by-one.

If bitcoins are mined

Miners must solve equations with a 64-digit hexadecimal solution known as hashes to obtain bitcoins. This consumes a tremendous amount of energy and electricity, making it a very costly process. The following yearly electricity consumptions for various economies are estimated in a Cambridge Centre for Alternative Finance report for 2021.

Country/Network Annual energy consumption (TWh)
China 6543
Global Bitcoin Network 129
Norway 124
Bangladesh 70

Since the bitcoins mined will be considered self-generated assets, it is unclear how they will be taxed, whether capital gains provisions will apply or if it will be classified as income from other sources.

If bitcoins are held as investments

In such case, Bitcoin can be considered as deemed capital asset If Bitcoin are held as an investment and are transferred in exchange for real currency, then these assets would be taxed as long-term capital gains if hold for 36 months or more (20 percent post indexation) or short-term capital gains if held for less than 36 month (taxed as per individual slab rate), depending on how long they were held by the taxpayer. However, if they are not treated as capital assets and are instead taxed as income from other sources, their tax rate will be the same as the individual’s taxation slab.

If bitcoins are held as stock-in-trade

According to the recent government notification, bitcoins held as stock-in-trade generates business income. Therefore, this business income will be taxed as per the individual tax bracket applicable to the individual.

If bitcoins are accepted as consideration

In this situation, any consideration received as bitcoins will be treated similarly to receiving money, i.e., it will be treated as income in the recipient's hands and taxed based on the profits generated by the business or profession.

However, the government has stated numerous times that it does not recognise cryptocurrencies as legal cash and it would not be equated to fiat currencies like the rupee. It's unclear how this digital, convention-defying asset class will fit into the Indian tax system, given the RBI's and other government bodies' neutral stance.

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CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.