How should Bitcoins Income be taxed in India?

Introduction

If you had invested Rs.100,000 on 1^st April 2013 in Bitcoins then your investment would have increased to Rs.63,17,308/- in a span of four years. In other words, your wealth would have grown 60 times the amount invested in just a span of four years, the fastest way as compared to other investment options like stock markets or real estate.

However, Bitcoins is a very volatile investment and subject to a lot of risks and hence people are always skeptical to invest into the Bitcoins. Further, people are still not aware of the Bitcoins and the Reserve Bank of India (RBI) has also cautioned people before investing in Bitcoins.

Even though there is a lot of confusion relating to Bitcoins, people are still investing into this crypto currency due to huge ROI and with a famous feature that Bitcoins gets double in every six months and therefore, even in the amid of confusion, people are still investing into the Bitcoins with the hope to earn greater wealth.

India and its taxation

India is not a tax heaven and hence every income earned in India shall be subject to income tax laws and if the income is not offered to tax, then the same is treated as concealment of Income and appropriate penalty is levied.

Hence, it is clear that whatever income is earned, the same must be offered to tax.
 

Nature of income from cryptocurrencies

As per the basic income tax structure, any income earned is divided into five major heads of income which are as follows:

• Income from Capital Gains
• Income from salary
• Income from house property
• Income from PGBP (business)
• Income from other sources

E.g. if you have invested into a capital asset, then the same shall be taxed under capital gains like shares, land, building etc. Likewise, if you are earning a salary, then the same is taxable under income from salary. Hence, to tax any income in India, its nature must be ascertained first so that it can be taxed correctly.

As said, the nature of income from Bitcoins must be understood with its basic meaning and form. Currently, many experts believe that people invest into the Bitcoins to earn the wealth appreciation and hence the same must be considered as a capital asset. However, it will be too early to tax the income as a capital asset.

Let us understand the complete picture of Bitcoins and how the same may be offered to tax in India.

Bitcoin – a virtual currency

The basic nature of the bitcoin is the currency and not the capital asset. As per the general definition of the Bitcoins, it is a worldwide cryptocurrency and digital payment system which is also called as decentralized digital currency, as the system works without a central repository or single administrator.

Hence, though it may be highly volatile or people are using it as an investment tool, it is still a currency before anything else and hence, the same cannot be said to the capital asset just because it is looking likes an appropriate head.

Here are certain reasons why Bitcoins should be used classified as a currency and not a capital asset:

• As per the basic nature of the Bitcoins, it is a cryptocurrency and not a capital asset. It can be used as an exchange method like any other money including rupees, dollars etc.
   

• Bitcoins cannot be said to be a nature of a commodity because it is not. It is a currency and in many countries, the same may be even redeemed against a local currency at any time.
   

• Japan has already recognized the Bitcoins as a method of payment and not as a capital asset, although US govt has treated the bitcoins as a capital asset.
   

• It is a legal tender however since it is an unregulated currency and hence it has not been backed by any central bank. However, just because it is not backed by a central bank, does not change its basic character of a money or currency.
   

• Many countries of the world have already installed many ATM for this virtual currency and hence, it is very clear that the world also looks at it like a currency and not a capital asset.
   
• People also invest dollars and other currency and earns an income when prices of the respective currency go up. However, we don’t treat that income as capital gain, rather we treat it under income from other sources. Likewise, when we don’t treat dollars like a capital asset, then we should also not treat Bitcoins as a capital asset.

In crux, we can say that bitcoin is now an exchange medium like any other currency of the world and hence, the same should be treated as with par with other currencies and not like a capital asset. This is because; we cannot treat Bitcoins like a property which is essential if we want to tax it under capital gains.

Under which head it should be taxed?

Ideally, the income of Bitcoins should fall under the following heads of income as per the intention of the holder:

• Income from PGBP (Business)
• Income from other sources

Let us understand when income from Bitcoins should be classified as PGBP or other sources.

Bitcoin income as a business income

If you are dealing in Bitcoins more frequently or if you are accepting bitcoin as a currency and you hold in your wallet the same, then any mark to market gain or loss should form your business income or loss. Let us understand it by way of example:

Example:

Suppose, you are a wholesaler of various wooden products and you made a total sale of Rs.900,000/- and accepted Bitcoins in return. The value of three Bitcoins at the time of acceptance was Rs.900,000/-. On 31^st March, you calculated the market value of the bitcoin and the same was amounts to Rs.12,00,000/-. In that case, the profit of Rs.300,000 shall be recognized in the business under exchange fluctuation and the same shall be credited to profit and loss account.

Further, in the year, you went on to convert the bitcoin into INR and you incurred a loss of Rs.200,000. Now, this loss shall be debited in profit and loss account.

Bitcoin income as income from other sources

If you are earning an income by converting bitcoin into INR and you do it on an occasional basis, not as your business, then the same shall be taxable under the head income from other sources.

Some frequently asked questions

Here are some frequently asked questions from the community across are answered as follows:

Q. Is bitcoin trading taxable in India?

Yes, the income from bitcoin is taxable in India. Further, there is no concept of bitcoin trading, since it is not a community rather it is a currency a virtual currency. Hence, any gain from currency exchange shall be taxable as explained in this article.

Q. Is bitcoin capital gains taxable in India?

As stated in our article, there cannot be any capital gain on bitcoin since it is a currency and not a capital asset.

Conclusion

In the absence of any guidelines or the notification from the government of India, we have tried to take the debate of taxation to another level for this future cryptocurrency.
You can connect with us for filing your Income Tax Return related to Bitcoin Income, By clicking here.

We have made a valid point that since it is a currency, you cannot offer the same under capital gain. Let us take this debate forward until we reach the conclusion.

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