India: Bitcoins-Global Currency Local Taxability

Last Updated: 29 January 2018
Article by Gagan Kumar and Amit Kaushik


Currently, each country has its own currency and it derives its value and trust amongst its users from the sovereign backing. It is tangible in nature and its transaction is facilitated and its balances are maintained by trusted third parties like Banks. Each currency derives its value in the international market on the basis of its demand and supply. It is regulated by the Central Banker of each country and it is not universally acceptable and may be required to be exchanged with other currencies during the course of international trade and commerce. The value of currency fluctuates due to several factors including the political and other circumstances in a particular country.

Due to these limitations, the concept of Crypto currency has been evolved and gained acceptance. Currently, such currencies are not regulated by any central authorities and may be universally acceptable in the times to come. Such currency derives their acceptability merely on the basis of the trust of its users and its value is determined on the basis of its demand and supply. Bitcoin is the first of such recognised crypto currency.

How does Bitcoin work?

Technically speaking, Bitcoin is a peer to peer electronic cash system that allows online payments to be sent directly from one party to another without the involvement of any institution. 

In other words, Bitcoins is an electronic system which works over internet and allows online payments or receipts between its users. Bitcoins are kept in the form of electronic records, which are safeguarded by passwords and complex mathematical functions. 

The electronic records are maintained in the form of Public Ledger and visible to each of its user and are technically called as Block Chain. Each block represents the transactions executed at one point in time and the entire Block Chain shows the transactions executed in Bitcoins since its invention in 2008. The Block Chain contains the entire balance of Bitcoins in circulation as on basis along with its owners. Once a transaction is executed in Bitcoin in any part of the world, the Public Ledger or the Block Chain is changed accordingly and any one can verify the same from its system.

Under Bitcoins, there is no involvement of any institution and it derives its value merely on the basis of its demand and supply, unlike the traditional currencies which have backing from the Central Banks. 

Who are Bitcoin Miners?

Since there is no intermediary involved in the Bitcoins system, the transactions are facilitated by the Miners, who in turn are rewarded by the system in the form of new Bicoins. This is how new Bitcoins are generated. Miners are persons who own sophisticated computers. Therefore, any person can become a miner by way of investing in the sophisticated next generation computer hardware and software.

Every new transaction in Bitcoins goes to a pending transaction pool and the miner who solves a particular block (a computer puzzle) before the rest of the miners in the world is given an option to get the transactions of its choice from the pending transaction pool to get executed or in other words, the transactions get into the Block Chain. As aforesaid, the miners are rewarded with newly generated Bitcoins for their work.

Therefore, in view of the above, there are broadly two entities in the Bitcoin system; the Users and the Miners. 

This article focuses on the income tax implications on such entities.

Implications under the Income Tax Act, 1961 for the Miners

As explained above that the Miners uses specialized computes to solve the computer puzzles and consequently helps in getting the pending transactions in Bitcoins executed, the Mining Business requires significant investment in the Computer Hardware and related software and Human resources, considering the fact that the computer puzzle has to be solved before the Miners of the rest of the world. 

The Miner may claim depreciation on the Investment in the Computer Hardware and related software under section 32 of the Income Tax Act, 1961 ("the Act") and claim revenue expenditure of the electricity and other business related expenditures under section 36 of the Act.

What is the taxable event for Bitcoin?

If a Miner successfully solves a puzzle, it is rewarded with Bitcoins. Therefore, the question which is poised for consideration is whether such Bitcoin is at all taxable and if yes, then whether it is taxable at the time of receipt or at the time of its sale by the miner? 

Generally, any non-monetary benefit in the course of Business is taxable under section 28(iv) of the Act. However, it is also important to note that the value of Bitcoin is not realized unless it is sold. Therefore, considering the volatility in the value of Bitcoins and Prudence Concept of accounting, such income may be recognized when there is reasonable certainty about its realization i.e in the year of its sale. 

It is also important to consider the fact that Bitcoin being a self-generated asset for a miner, it would be interesting to see the controversies which may crop up in its taxability in the times to come with regard to the valuation of self-generated but unsold Bitcoins. 

Implications under the Income Tax Act, 1961 for the Users

A user may either be a trader or an Investor. Consequently, any profit or gain from the sale of Bitcoins may be treated as Business Income or Capital Gains. Reliance in this regard may be had to Central Board of Direct Taxes (CBDT) circular no. 4/2007 dated 15th June, 2007 which provides guidelines as to whether a person is a trader or investor in stocks.

Regarding losses, it has to be seen whether the transactions in Bitcoins can be treated as a speculative transaction in terms of section 43(5) of the Act. Considering the fact that there is an actual transfer of Bitcoins on its sale, it may not be treated as a speculative transaction and losses can be set off or carried forward just like a normal business loss under chapter VI of the Act. 

Miscellaneous Implications

Considering the fact that the Bitcoins are highly volatile and lacks transaction trail, the tax departments is seeking to recover from the Miners and Users on real time basis in the form of advance taxes. 

It is also important to note that the Transactions in Bitotins can be processed only through a private key of its user and since no intermediary is involved, hence it may be challenging for the revenue authorities to seize/or attach the Bitcoins unlike the traditional Bank Accounts.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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