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Income Tax on Bitcoins | Are Bitcoins Legal in India?
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.
However, profits made from bitcoins are subject to tax and must be reported in the ITR. This article will help you understand the taxabillity and reporting requirements of bitcoins.
Latest Update
The Income Tax Department has started sending notices to those who have skipped reporting under schedule VDA or misreported gains in AY 23-24 or AY 24-25.
So if you have -
- Misreported crypto income
- Skipped schedule VDA
- Claimed wrong deductions
File ITR-U (updated) for AY 23-24 & AY 24-25 and avoid further consequences. File ITR-U Now!
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.
Is Bitcoin Legal in India?
Bitcoin is neither authorised nor regulated by any central authority in India. There are no established rules or guidelines to resolve disputes arising from bitcoin transactions, which makes them inherently risky.
However, this does not mean that Bitcoin is illegal in India. So far, the government has not imposed any ban on its use. In fact, on 25 February 2019, the Supreme Court directed the government to frame regulations for cryptocurrencies. The matter was adjourned on 29 March 2019 and scheduled for a hearing in the second week of July 2019.
The Finance Ministry has also clarified in press conferences that bitcoin and other cryptocurrencies are not legal tender. Therefore, they should be treated as assets rather than as currency.
How are Bitcoins Taxed in India?
The Finance Act 2022 introduced Section 115BBH, which imposes a tax on income earned from trading in Bitcoin, cryptocurrencies, and other Virtual Digital Assets (VDAs).
The Union Budget 2022 also clarified the following:
- The government officially classified digital assets, including cryptocurrencies and NFTs, as "Virtual Digital Assets."
- Income from the transfer of VDAs will be taxed at a flat rate of 30%, irrespective of whether it is treated as capital gains or business income.
- No deductions are allowed except for the cost of acquisition when reporting income from VDA transfers.
- You cannot set off or carry forward losses from digital assets against any other income.
- If you receive digital assets as a gift, the value will be taxable in your hands.
- Losses from one digital currency cannot be set off against gains from another.
- From 1 July 2022, a 1% TDS applies to all sell transactions involving VDAs, including cryptocurrencies and NFTs.
Scenario A: Bitcoin Mining
In a blockchain network, miners verify transactions by solving complex mathematical problems. The first miner to solve the problem earns a reward in cryptocurrency.
Income from mining is taxed at a flat rate of 30%. For tax purposes, the cost of acquisition is treated as zero. You cannot claim deductions for mining-related expenses like electricity or infrastructure costs.
Scenario B: Bitcoins Held as Investment and Sold for Real Currency
If you hold bitcoins as an investment, they are treated as capital assets. As per Section 115BBH, gains from their sale are taxed at 30%.
You must report these under "Capital Gains."
Here’s a simple example:
| Particulars | Hypothetical Values (INR) |
| Bitcoins purchased | 10 |
| Purchase price per bitcoin | 2.72 |
| Total purchase value (A) | 27.2 |
| Sale price per bitcoin | 8.72 |
| Total sale value (B) | 87.2 |
| Capital Gains (B - A) | 60.0 |
Scenario C: Bitcoins Held as Stock-in-Trade and Sold for Real Currency
If you trade in bitcoins as part of your business, the resulting income falls under "Income from Business or Profession." You need to report this under Schedule VDA by selecting the appropriate nature of income.
Section 115BBH imposes a 30% tax on the profits. You cannot claim any deductions except for the actual cost of acquisition.
Scenario D: Bitcoins Received as Payment for Goods or Services
Section 115BBH doesn’t specifically mention the tax treatment of receiving bitcoins in exchange for goods or services. However, the fair market value of bitcoins received should be treated as income for the sale of goods or services and taxed under "Income from Business or Profession.
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.
Calculating taxes can be complex if you earn from multiple sources, especially cryptocurrencies. But don’t worry—our tax experts will not just help you calculate your taxes but also maximize your tax refund with some piece of advise so you can keep more of what you earn. Since the e filing income tax returns has already started, why wait for the last date to file ITR? Book eCA Today!
