Due to the recent growth in Bitcoin trading activity in the country, India’s tax department has reportedly decided to “chase” the data it has acquired about individuals trading BTC way before the Reserve Bank of India banned it in 2018.

Whether or not this information is accurate is not yet known, therefore we can’t really say if the tax department is serious about this venture. However, we know that this information was leaked, so the outcome will probably not matter to crypto investors. Why? Because it’s either an attempt to encourage crypto traders to voluntarily provide information about their crypto holdings or to actually establish a whole new taxing system in the country.

Bitcoin trading activity - Calculator Pen Paper

Why now of all times?

As many may know, Bitcoin has gotten extremely close to its all-time high recently, thus propelling millions of traders to resume their trading activities, skyrocketing the volumes on international exchanges as well as local crypto companies.

This much activity was probably too much for the tax department to simply ignore. And according to sources, the daily trading volume in India alone is $27 million. That may seem quite low for a population of over 1 billion people, but remember that the regulatory clarity of this asset is quite vague in the country.

But enough about the background information. How exactly is the tax department going to find these traders and then tax them? What laws can they use to justify their taxing requirements? Well, let’s find out.

Capital gain tax

The most obvious approach is to employ the capital gain tax law. This basically means that the government will look at people’s purchase history. For example, if somebody had purchased Bitcoin for $3,000 and sold it for $5,000 that means their capital gain is $2,000. The tax department would then apply the percentage officially recognized by Indian law and send a letter to the individual trader requesting immediate payment.

How do we know this? Well, because this is exactly what the tax department does with any type of investment type.

If we want to bring an example, let’s just bring forex trading in India into the mix as it’s relatively vaguer compared to things like commodities and stocks.

You see, the main idea of the capital gain tax is to identify the actual gain somebody has gotten from selling something they had previously bought. For example, if you bought a bar of gold for $10,000 in the past, but sold it for $15,000 your capital gain is $5,000 and it’s quite easy to identify.

However, when it comes to currencies, it’s a bit harder to identify. This is where leverage kicks in for the industry, diluting the actual gains. It’s possible for people to make hundreds of dollars from just a $10 trade.

The same goes for cryptocurrencies. Traders can easily generate thousands in profit from a small investment, thus the main reason to try and avoid these taxes.

An uphill legal battle awaits

Here’s the hurdle in this story. The tax department can’t just go around and collect due tax on crypto capital gains. This is because cryptocurrencies are not recognized as investments or capital in a sense.

Therefore, there is no legal basis for the tax department’s actions at the moment, nor was there any basis for collecting user data from service providers in the first place. That privilege falls under the RBI, as it’s officially recognized as the financial regulator of the country.

All of these doubts and steps that need to be taken casts a shadow of doubt on this whole “we’re going to collect tax” announcement.

The number one issue is that cryptocurrencies were never recognized as something taxable in the past, therefore traders didn’t have the heads-up to account for the tax they would have to pay. Therefore, requesting payments from gains seen years ago could be a completely illegal thing to ask for.

Any Indian trader would have the absolute right to bring this issue to court locally as well as internationally. Should the tax department in India want to still collect their share of the funds, they should work with the RBI to create a transparent, comprehensive, and enabling regulatory landscape for cryptocurrencies, which will allow for a much more comfortable environment for crypto traders.

Should these actions be taken, it’s very likely that traders themselves will declare the capital gain on a monthly basis and pay their dues without having their privacy infringed while not even being warned about it.

Overall, it’s a complete legal mess at this stage, with very little explanation coming from the tax department. There has been no action plan proposed, leading many to believe that this is nothing but a bluff to scare as many easily impressionable traders as possible to come forward and pay these taxes.

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Disclaimer: The contents of this article are for information purposes only and do not constitute an advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc before acting on the basis of the above write up.  The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that Author / TaxGuru is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof.

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