Although bitcoins have been thought to be illegal, it is far from true, but the government is taking measures to regularise the use of virtual currency
Many people have termed bitcoins as an illegal form of currency and even the Reserve Bank of India (RBI) had also warned the investors of the potential risks involved in dealing with Bitcoins. Bitcoins had also given rise to many theories about its taxability i.e. how the taxation will work in case you sale or transfer your bitcoin.
Legal status of bitcoins in India
Dealing in bitcoins in India is not yet illegal. However, bitcoins have yet to be regulated, which means that the government is not regulating this currency the way it regulates Indian Rupee or any other form of currency. An interdisciplinary committee has already been set up by our government to explore the framework regarding virtual currency.
Treatment under Income Tax Act
Any profit or gains made on dealing, trading or buying-selling bitcoins is surely taxable as it gets covered under the definition of income under section 2(24) of Income Tax Act which is a wide section to include every income unless it is exempt under the act.
Let’s assume that you don’t have any income other than the income you derive from the sale or trading of bitcoins and the same is less than Rs 2,50,000 i.e. basic exemption limit up to which a person does not need to pay any tax, then in that case you do not need to pay any taxes. But in case your income from bitcoin alone or including other sources like salary or business income is more than the basic exemption limit then the same needs to be declared and you need to pay taxes on the same. In fact, you need to file your tax return as well and also pay advance tax on it.
When will bitcoins provide income?
Let us break this in to three stages as follows and understand at which stage you need to pay taxes:
On purchasing bitcoins: There is no tax liability on simply purchasing bitcoins.
When the value of the bitcoin begins to appreciate: As long as you are holding your bitcoin investments like you do with your stocks or property where in spite of rise in your stock portfolio or property valuation, you do not pay any tax till the time you actually sale it off and book the profit or gains. Similarly, mere appreciation in the price of bitcoin will not make you pay any taxes till the time you actually sale it or transfer it to someone in exchange of any other benefit in cash or kind, irrespective of the magnitude of the appreciation.
On sale or exchange of bitcoins: This third important scenario actually gives rise to taxability, it means the moment you sell or trade your bitcoins or exchange with any other thing say Indian or foreign Currency currencies or even trade your bitcoins as a barter for buying any other thing or paying for any kind of purchases, the taxability arises. It means that in any of these scenarios, the resulting gains will become taxable, you need to declare, compute and discharge the tax liability as mentioned earlier in the article.
The author is a Chartered Accountant and the Chief Gardener & Founder Director of Money Plant Consulting, a leading Tax & Investment Planning Advisory Service Provider
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