pri Cryptocurrencies and its Likely Tax Treatment in India Cryptocurrencies and its Likely Tax Treatment in India


Cryptocurrency is the Intriguing buzz word these days. Earlier they were dismissed as a ‘tech-bubble’ by various ‘experts’ but the opinion of global leaders is altogether different.

“Bitcoin could be a technological tour de force.” –Bill Gates

“We have elected to put our money and faith in a mathematical framework that is free of politics and human error.” – Tyler Winklevoss (Co-inventor of Facebook).

“I am a big fan of Bitcoin. The fact that the bitcoin universe an algorithm replaces the functions of the government is pretty cool.” – Al Gore (45th Vice President of the US)

“I think Bitcoin has the potential to change the world.”–Peter Thiel (Co-Founder of PayPal)

“Entire classes of bugs are missing.”–Dan Kaminsky (Cisco’s Security Penetration Expert)

“You can’t stop things like Bitcoin. It will be everywhere, and the world will have to re-adjust.–   John McAfee

The Merriam Webster dictionary defines cryptocurrency as: “any form of currency that only exists digitally, that usually has no central issuing or regulating authority but instead uses a decentralized system to record transactions and manage the issuance of new units and that relies on cryptography to prevent counterfeiting and fraudulent transactions.

Therefore, cryptocurrency is not a traditional ‘currency’ but a decentralised digital asset and a medium of exchange. There are more than ten thousand cryptocurrencies. Examples of cryptocurrencies are Bitcoin, Litecoin, Ethereum, Zcash, Dash, etc. but one should deal in the one which has higher market capitalisation, Long history and Good network effects.

This article covers the following aspects with respect to cryptocurrencies:-

1. Introduction

2. Formation of Cryptocurrency (Mining).

3. Legality of cryptocurrency in India and its Regulatory History.

4. Tax implications on Cryptocurrency in India.

5. Conclusion.



Cryptography is the process of converting understandable information into muddled codes which are hard to interpret so that only those for whom it is intended can read and process it. Currency is money in any form used as a medium of exchange.

Therefore, Crypto Currency is a form of currency that uses cryptography to functions as money. Cryptocurrencies hold every quality and property of money like Store of value, Asset class, appreciation in value.

The Financial Action Task Force (FATF) defines ‘Virtual currency’ as a digital representation of value that can be traded digitally and functioning as :-

1. a medium of exchange; and/or

2. a unit of account; and/or

3. a store of value, but not having a legal tender status.

The FATF report also defined ‘cryptocurrency’ to mean a math based, decentralized convertible virtual currency protected by cryptography by relying on public and private keys to transfer value from one person to another and signed cryptographically each time it is transferred.

Advantages and Disadvantages of cryptocurrency

Sno. Advantages Disadvantages
1. No intermediary required. Highly volatile
2. No Geographical barrier Transactions are irreversible.
3. Cheaper, safer, faster Usage in illegal activity or dark web

Need of crypto currency.

For example, If Mr. Parva from India wants to send money to Ms. Chandni in United States, he will not be able to send money without help of third-party i.e., bank. Bank will verify certain things such as identity of sender, receiver etc., charge its commission for currency conversion and then ultimately transfer the funds. Here comes the need of the digital currency which is without any barrier or boundaries. With the help of virtual or digital currency, Parva could have directly sent the money to Chandni without help of any third party.

Birth of Cryptocurrency

  • In 2008, The World faced Big Financial Crisis because of the banks like Lehman bros. advanced bad loans and did not act diligently.
  • It was then a software developer under the Pseudo name Satoshi Nakamoto came up with a way to build a monetary system with full transparency, more trust on system without trusting a single party like bank.
  • It proposed that instead of a bank recording every transaction in one central ledger, all the users would record all the transactions in a public ledger as a result, any attempt to fail the community would be noticed and the payment will be rejected.
  • The reason behind pseudo name is that investors don’t lose confidence in bitcoin if something happens to Satoshi. We are unaware whether now he is alive or not.

Block chain Technology

A cryptocurrency works on block chain technology.


  • Block is a database containing a lot of information.
  • When one block is filled, information will be stored in another block.
  • All such blocks will be linked or tied together with the help of the chain; Therefore, it is called blockchain.
  • In our original example the information can be about sender, receiver, amount, time and date of transaction.
  • The data about all transactions is equally present in countless computers which keep track of all transactions involving bitcoin. These computers keep a watch over each other, such that nobody can manipulate the bitcoin amounts.
  • In lay-man’s terms, blockchain is like a group of friends around a cake, where each one has its own piece who can either eat it, give it to someone or exchange it against something else. However, none can bring in a different cake from elsewhere or remove a piece from the table, since everyone is watching.

Formation of Cryptocurrency (Mining)

  • Mining is an activity where a person known as a miner utilizes his computing ability to solve troublesome 64-digit hexadecimal equations, riddles and codes known as hash. Through Mining the transactions are verified and validated on a block chain. Successful miners obtain new cryptocurrency as a reward.
  • In our original example there was the bank to verify the transaction now with cryptocurrency there are no intermediaries to verify the transaction. There are thousands of people all over the world who are there to verify the transaction. Such people are called as miners.
  • If an original example Parva sends Bitcoins to Chandni he would not say that in plain language it must be written in to sub cryptic language, some mathematical problem. Now miners all over the world try to guess answer to the mathematical problem.
  • Maximum 21 million bitcoins can be mined, right now 18.6 million, by 2140 all 21 million will be mined.

Legality of Cryptocurrency in India

  • There is no law that prohibits the buying and selling of cryptocurrencies in India. It is an asset class where one can invest, but the same is not considered legal tender.
  • No one can technically stop bitcoin as there is no control of any centralised party.
  • In last few years the role of Cryptocurrency has diminished as a currency. It is evolving more like an asset class Like gold.
  • No country in the world has banned cryptocurrency till now, further some countries like EI Salvador have given legal tender status to bitcoin.

The Regulatory History of Crypto Currency in India

Hon. Apex Court in the landmark case of Internet and Mobile Association of India vs. RBI W.P (Civil) No. 528 of 2018, dated 4 March 2020 quashed the RBI circular which prohibited banking facilities from being offered to participants involved in cryptocurrency transactions. Since then, it’s allowed to trade into digital or virtual currencies.

RBI on 6th April 2018 had directed banks not to deal with entities dealing in virtual currencies and to exit the relationship, if they already had one, with such entities.

The RBI issued a fresh circular dated 31.05.21 reiterating the lawful delicate status of Crypto Currencies which states as follows.

“ It has come to our attention through media reports that certain banks/ regulated entities have cautioned their customers against dealing in virtual currencies by making a reference to the RBI circular DBR.No.BP.BC.104/08.13.102/2017-18 dated April 06, 2018. Such references to the above circular by banks/ regulated entities are not in order as this circular was set aside by the Hon’ble Supreme Court on March 04, 2020 in the matter of Internet and Mobile Association of India vs. RBI W.P (Civil) No. 528 of 2018, dated 4 March 2020 . As such, in view of the order of the Hon’ble Supreme Court, the circular is no longer valid from the date of the Supreme Court judgement, and therefore cannot be cited or quoted from”

Tax Implications on Cryptocurrency in India

In response to a question posed on March 23 2021 in parliament, Union minister of state for Finance Anurag Thakur elaborated regarding the taxability status, stating that as per Section 5 of Income Tax Act 1961, the total income will constitute all earnings of an individual from all sources whether legal or not. Also, any business activity that pertains to cryptocurrencies or assets, unless specifically exempted, is taxable under Goods and Service Tax. Likewise, “supply of any service, if not specifically exempted, is taxable under GST and no service related to cryptocurrency exchange has been exempted. “He also said that the government was considering all options with an open mind and will make sure that the interests of investors are protected. The R.B.I is also working on India’s own digital currency and the government had also constituted an inter-ministerial committee, where secretaries had submitted a report”.

Tax Implications Under Direct Tax Regime

Currently there is no provision in Income tax Act which categorizes where, a cryptocurrency would fall and there have been no judicial precedents in this regard.

The definition of income in section 2 (24) of The Income Tax Act, 1961 is inclusive and not exhaustive. The word’ income’ is not restricted to the ‘profits’ or ‘gains’. The purpose of the definition is not to limit the meaning of’ income’ but to widen its net. even if a receipt did not fall within the ambit of any of the clauses defined, it can still partake the nature of income, unless expressly exempted.

Proceeding onward, if digital money is considered as currency’, it would not be susceptible to tax as per the Income Tax Act. Firstly, neither the natural meaning nor Sec 2(24) of the IT Act includes ‘money’ or ‘currency’ as income, although it includes ‘monetary payment’. Secondly, being a mode of consideration, the tax incidence would be on the transaction and not on the currency.

On the other hand, if cryptocurrency is considered as property, then clearly it would be either covered within the charging provision of ‘Profit and Gains from Business and Profession’ or ‘Income from Capital Gains‘. In the absence of specific guidance of the Central Board of Direct Taxes (CBDT) the general principles of the period of holding, frequency of trading, size of holding as well as treatment in books of accounts that shall be relevant for the purposes of establishing whether the gain from the sale of cryptocurrency shall be assessed as Business Income or Capital Gains. There can be no one size fits all formulae. The conclusion would have to be arrived at based on the relevant matrix of facts in each case.

Treatment under the head ‘Capital Gains’

Sec 2(14) of the IT Act defines a capital asset as “property of any kind held by the assessee whether or not connected with his business or profession”; This definition of ‘capital asset’ provided is widest in itself and covers all kinds of property except those expressly excluded under the Act. Therefore, any gains arising out of the transfer of cryptocurrency must be considered as capital gains, if they are held for investment and the frequency of the transactions is irregular

Sno. Holding period. Nature Rate of Tax
1. 36 months or more Long-term capital gains flat rate of 20% with the benefit of indexation
2. less than 36 months short-term capital gains slab rates applicable to a taxpayer

Taxability under ‘Profit and Gains from Business and Profession’

The term “business” as envisaged under section 2(13) of the Act which reads as follows: “business” includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce, or manufacture, the first and obvious candidate to be subject to Indian Income-tax under this head of Income, would undoubtedly, be the Indian ‘miner’.

Moreover, any continuous activity like trade in cryptocurrencies is included within this definition, and profits realized are taxable thereunder, chargeable under Section 28 of the Income Tax Act.  The profits may not necessarily be in the form of money, they are taxable even if they are ‘in-kind’. Any expenditure incurred for this purpose, such as the purchase of computing power as a capital asset, should be allowable as a deduction per the provisions specified in Sec 30 to Sec 43D of the IT Act.

Similarly, if cryptocurrencies are held as ‘stock in trade’, then income arising therefrom will attract tax under business income. Although a position can be taken by the revenue authorities that such trading is treated as ‘speculation transaction’ as envisaged by Section 43(5) of the Act which would adversely impact taxpayers. the word ‘commodity’ could be construed to be of a wide enough to contain cryptocurrencies within its fold.

The Supreme Court, in a recent decision of Engineering Analysis Centre of Excellence Private Ltd. v. CIT 2021 SC , held that amounts paid by resident Indian end-users / suppliers as consideration for the resale / use of the computer software through distribution agreements is not the payment of royalty for the use of copyright in the computer software and therefore the use of the copyright in the software does not give rise to any taxable Income in India (as royalty). This Judgement perhaps could shed some light upon the taxability of ‘cryptocurrency’, especially with regards to the deduction of tax.

The deduction of tax at source, if required, would depend upon the factual matrix of each transaction.

Sno. Nature of Activity Tax at source
1. Resident providing resources for Mining against consideration Section 194C
2. Crypto exchange set up in India 194H
3. Resident assist in transfer of Cryptocurrency & charges brokerage 194H
4. Payment of certain sums by e-commerce operators to participant Section 194-O
5. payments to non-residents Section 195 r.w.s DTAA

Another view on Taxability of Crypto currency generated in the ‘mining’ process,

The taxpayers may also take the benefit of judgment of the Hon. Supreme Court in the case of B.C. Srinivasa Setty [1981] 128 ITR 294 (SC) Bitcoins generated during the ‘mining’ process can be classified as self-generated capital assets  Since, the cost of acquisition of such Bitcoins is not available. In this case it was held that if cost of acquisition of an asset cannot be ascertained, the machinery provision for computation of capital gains will fail, therefore, no capital gains can be levied on transfer of such assets.

Tax Implications Under Indirect Tax Regime

As per The Sale of Goods Act, 1930, the term ‘goods’ means any kind of movable property other than actionable claims and money. The mining activity by itself gives rise to the cryptocurrency, by consuming copious amounts of computing power and resources. The resultant cryptocurrency from this activity could also be classified as ‘goods. The treatment of cryptocurrency as goods implies that the supply of bitcoins is a ‘taxable supply’ and hence subject to GST.

The CBIC vide FAQs on Information Technology (‘IT’) and IT enabled services held, that if a predeveloped or pre-designed software is supplied in any medium/storage (commonly bought off-the-shelf) or made available using encryption keys, the same is treated as a supply of goods in terms of Schedule II of the CGST Act.

Technically, a supply of cryptocurrency as goods or property in exchange for other virtual/real goods should fall within the ambit of ‘barter transaction’ since it is simply an exchange of one good for another. Any barter transaction has two essentials:-

i. direct exchange of goods or services for other goods/services and

ii. no use of money.

An approach where cryptocurrencies are considered as goods means that some transactions would be taxed twice – at first on supply (otherwise exempted for a transaction in money and secondly on consideration, unnecessarily leading to higher tax. This higher incidence of taxation puts the businesses operating in cryptocurrencies at a huge disadvantage which also diminishes their purchasing capacity. The issue gets further complicated in cases of international transactions.

Before GST, under the various state VAT laws, the incidence of tax arose when there was a sale of goods in exchange for cash, deferred payment, or any other valuable consideration. The expression ‘any other valuable consideration’ leaves out a wide scope of ambiguity, since the term should typically derive reference, ejusdem generis, from its preceding terms (i.e., cash and deferred payment), and therefore, must not include an exchange of goods for other goods.

This view was taken by the Apex Court in Sales Tax Commissioner v. Ram Kumar Agarwal, where a transaction of gold bullions in exchange for ornaments was excluded from the definition of sale under Sec 2(h) of the Sale of Goods Act, 1930. However, the position is similar to when a transaction is used as a device to conceal monetary consideration, courts may unravel the device to include it within the ambit of sale.


Block chain technology has a variety of uses and purposes and the reputed cryptocurrencies (especially bitcoin) have by and far managed to hold on to ‘money’s worth’ instead of being a tech bubble. Within the taxation and regulatory aspect, the challenges are immense including the question of cryptocurrencies remining off book, being traded on one-on-one basis, invoking the wrath of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.

The virtual currencies in today’s scenario have the potential to boost India’s digital infrastructure framework and reduce banks’ infrastructure costs attributable to cross-border payments, securities trading, and regulatory compliance.

We still need explicit explanation from the government on cryptocurrency taxation, particularly on issues such as treatment of capital gains or business income, classification as speculative income, allowability of set-off, and carry-forward of losses, and applicability of deemed gift tax provisions.

Recognising and regularisation cryptocurrencies and also levying taxes on them, should be considered a welcoming move and ought not to be viewed as a limitation. It is a two-way path for the crypto transactions to be traced and utilized lawfully as well as generating income for the government to be used efficiently. employing tax on crypto as a policy matter can help to provide an ideal atmosphere to guarantee the dealers that their money is safe and the risks involved in trading are likewise mitigated.

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  1. Aniruddha Sen says:

    Informative article, waiting for the govt stand on crypto currency. I think it should not be banned as people have the freedom to invest wherever they want unless it is something illegal like narcotics or hawala.

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July 2021