Taxation Aspect of Bitcoin in India

Narendra Kumar

14 Dec, 2020

Bitcoin is one of the types of cryptocurrency and a worldwide payment system. It is the first decentralized digital currency launched in the year 2009. It is decentralized because it works without a central repository or single administrator.

It is a peer-to-peer network and the transaction under this system takes place between users directly through the use of cryptography. There is no intermediary involved in the whole transaction^[1].

All the transaction taking place in this system is recorded in a public distributed ledger called a blockchain and verified by network nodes.

Bitcoin is received or created by a process known as mining. Bitcoin can be exchanged with any other currencies, products, and services. These processes are considered to be the backbone of the distributed ledger that verifies and records all payments made in Bitcoin. Those who have no interest in mining the cryptocurrency can obtain bitcoins by either buying them off a bitcoin exchange against “real” currency or by accepting bitcoins as payments for goods and services.

Legality of Bitcoin

Cryptocurrencies like bitcoin fall outside of the current regulations governing currencies in India. This does not mean that bitcoins are illegal, it just simply means that they are at this moment unregulated and therefore outside of the definition of currency and the law that governs the use of such currency.

The more simple way to understand Bitcoin is to treat it as a commodity, as the value of bitcoins is not recognized by the government but primarily by the users and creators of the cryptocurrency. In this regard bitcoin can be best viewed from a regulatory perspective, “It is a digital commodity that has been given an arbitrary value by those who deal with it”.

Taxation of Bitcoin in India

Taxation of Transactions Where Consideration Is Paid in Bitcoins

While the general acceptability of bitcoins in India is pretty low, it is not very common to find the businesses which are accepting bitcoins as consideration for the sale of goods and services. The typical transactions, in this case, would be as defined with the help of the example:

A is a Mumbai based dealer in furniture’s, he sells a table to R, a Canadian businessperson who thinks the table would complete the look of his new London apartment. R offers to pay the amount of table to A in bitcoins, which A gladly accepts. As consideration for the shipment, R pays A 20 bitcoins. How would “A” be taxed on this income in India?

Similarly, say B is a software developer in India who has provided his services to a client S, who resides in San Francisco who pays him a retainer, on a monthly basis in bitcoins. How would “B” be taxed on this income in India?

From an Indian tax perspective, this transaction is like barter. A sold one thing for another i.e. by accepting bitcoins in exchange for his table. And B provided his service in exchange for bitcoins. In both cases, the sellers and the services provider accepted bitcoins instead of cash in a barter transaction.

As per the tax code in India is concerned profits, incomes, and gains are taxable even if they are received in money’s worth instead of real money or currency. Therefore, the value of the bitcoins received would be considered as an income in India and will be subject to a charge in the hands of the recipient and the profits on such income will be subject to tax.

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Therefore, A’s profit on the transaction will be calculated as:

INR value of bitcoins received less the cost of the commodity i.e. table and similarly, B’s profits would be equal to the value of bitcoins received less any deductible expenses incurred while rendering of the services.

The tax rate on any gain would depend on the time period you hold the cryptocurrency. If the crypto is held for more than a year, long-term capital gain rates will apply, which is 15% or 20%. If it is held for less than one year, rates of short-term gain will be applied.

Practical Considerations

Though it may appear very straightforward there are significant practical considerations to consider when it comes to accepting bitcoins as payment in India. For example, exporters of goods have to receive inward remittance through authorized banking channels within a limited time frame for the goods they have exported. The exporter of goods, A and services, B would not be able to satisfy such requirements and would, therefore, risk penalties and prosecution in India. There are also other considerations as well that would prevent presently a large scale adoption of the cryptocurrency in India.