What is Bitcoin
Bitcoin was born as a new age decentralized, peer-to-peer currency that is not issued, controlled or regulated by any single government or central bank. One of the key aspects of bitcoin is the distributed ledger system called the block chain which controls the peer to peer transactions that happen over the bitcoin network. Any transaction that happens over the bitcoin network is verified by the bitcoin distributed network and is entered into the block chain ensuring the authenticity of transactions.
Since bitcoins are not issued by any central bank they have to be created via an alternative process. The process of creation of bitcoins is called “mining”. Despite the terminology, there is no digging involved, to mine Bitcoins the miner has to use his/her computer and it’s computing prowess to crunch complicated equations. These processes are said to be the backbone of the distributed ledger that verifies and records all payments made in Bitcoin. The miners are awarded newly created bitcoins in consideration for their efforts to help maintain the block chain. Therefore, a miner literally helps in the creation of a new bitcoin every time he/she is awarded a bitcoin for their efforts.
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.
The bitcoin network bypasses central banks and governments for its creation, storage, and transmission. As an obvious side-effect, it also does not require the intervention of banks to be able to make transactions whether within the borders of a country or across global borders. Transactions that would otherwise require the wherewithal of the global banking system. In the elimination of the banking middleman bitcoin provides its users easy transfers without the transaction costs.
Bitcoins also offer the intangible advantage of anonymity. This is a double-edged sword while it endears bitcoin to the libertarians who would want to keep their legitimate activities away from the watchful gaze of the government it also alleged to help criminals, terror organizations, and other wanton elements keep their transactions secret.
Legality of Bitcoin
Cryptocurrencies such as bitcoin fall outside of the current regulations governing currencies and legal tender in India. This does not mean that bitcoins are illegal, it just means that they are at this moment unregulated and therefore outside of the definition of currency and therefore the law that governs the use of such currency.
In this context, a more appropriate way of looking at bitcoin is a commodity, since the value that implicit in bitcoins is not recognized by the government but primarily by users and creators of the cryptocurrency. In this regard bitcoin can at best be viewed, from a regulatory perspective, as a digital commodity that has been ascribed an arbitrary value by those who deal with it. The taxation of bitcoin, therefore, depends on this very classification.
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 unusual to find savvy businesses accepting bitcoins as consideration for the sale of goods and services. The typical transactions, in this case, would be as follows :
A is a Delhi-based dealer in antiquities, he sells a vintage table to R, a Russian businessperson who thinks the table would complete the look of his new London apartment. R offers to pay A in bitcoins, which A gladly accepts. As consideration for the shipment, R pays A 10 bitcoins. How would “A” be taxed on this income in India?
Similarly, say B is a web developer who has provided his services from India. His client S, based in San Francisco 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 a barter. A traded one commodity for another by accepting bitcoins in exchange for his table. And B trader a service in exchange for bitcoins. In both cases, the sellers / services providers accepted bitcoins instead of cash in a barter transaction.
In so far as the tax code in India is concerned income, profits and gains are taxable even if they are received in money’s worth instead or real money or currency. Therefore, the value of bitcoins received would also be considered income in India in the hands of the recipient and the profits on such income subject to tax at the rates applicable to both A and B.
Therefore, A’s profit on the transaction would be equal to the INR value of bitcoins received less the cost of the table and similarly, B’s profits would be equal to the value of bitcoins received less any deductible expenses incurred while rendering the services.
Though it may appear very straightforward at the outset, 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 for exports of goods through authorized banking channels against within a limited time frame. 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 other considerations as well that would prevent a large scale adoption of the cryptocurrency in India at this given point of time.
Conversion of Bitcoin and taxation thereon
Given the limited adoption of bitcoin, it is obvious that the need will arise where the holders of such bitcoins will have to convert them into rupees to be able to spend them on the open market. At such point of time, the difference in the value of the bitcoin when it was first received and when it was converted shall be taxable in the hands of the holder. To illustrate this using an example, if A the furniture exporter were to convert his 10 bitcoins into Rupees he would receive as on date today (1.5.2016) a sum of roughly around Rs 2,90,000 at a conversion rate of 29,762 Rupees per bitcoin. The taxable value of bitcoin held by him would be calculated as per the following table.
|Value of BitCoin when received as consideration||20,000 ( assumed)|
|Value of Bitcoin when converted||29,762|
|Taxable Value in hands of holder||9,762|
|Total tax liability (X10)||97,672|
Hence, at the time of conversion, a sum of 97,672 will be taxable as capital gains in the hands of the holder of such bitcoins.