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What are Bitcoins?
Bitcoin is one of the first cryptocurrencies, and it is a part of the global peer-to-peer payment system. Cryptocurrency is digital money. It is thought to be more secure than actual money. Cryptocurrency transactions are secured using a technique known as cryptography. To put it another way, cryptography is a process of transforming comprehensible data into complex codes that are difficult to interpret. Digital currencies, alternative currencies, and virtual currencies are all subsets of cryptocurrencies. In the year 2009, Bitcoin became the first cryptocurrency.
After that, the number of cryptocurrencies rapidly increased, including Litecoin, Ethereum, Zcash, Dash, Ripple, etc. Given the government's efforts to move towards a cashless economy, bitcoins have slowly begun to gain acceptance in India. However, it is important to note that bitcoins are not currently controlled or regulated by any statutory body. In fact, peer-to-peer Bitcoin transactions are facilitated by blockchain technology, which functions as a public ledger for all transactions.
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 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 a deemed capital asset If Bitcoin is held as an investment and transferred in exchange for real currency, then these assets would be taxed as long-term capital gains if held for 36 months or more (20 percent post indexation) or short-term capital gains if held for less than 36 months (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 generate 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.
Why should you be cautious while investing in Bitcoin?
Financial experts advise investors to be cautious when considering Bitcoin due to its speculative nature and high risk. Here is what experts say about investing in Bitcoins:
- Invest only if interested: Financial planners prioritize your financial security. They recommend against Bitcoin unless you initiate the conversation, as Bitcoin's performance could impact your ability to meet financial goals.
- Consider it a side investment: Bitcoin is viewed as a speculative investment, similar to funds used for gambling, and shouldn't be a core part of your long-term financial plans.
- Limit your investment: Experts recommend keeping Bitcoin to a small percentage (1-10%) of your overall investments, even if you're interested in it. This approach is similar to how advisors would suggest limiting your investment to a single stock.
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