What
is Bitcoin
Bitcoin is a Cryptocurrency
(virtual money) which can be used as payment method worldwide. Unlike USD which
is controlled by Federal Reserve Bank (Feds) and INR which is regulated by
Reserve Bank of India no authority regulates bitcoin.
Bitcoins are kept in highly
encrypted form in cryptographic wallets holding “Bitcoin Address” and that’s
why it is very safe as it is almost impossible to invade these wallets which
mean nobody can steal your bitcoins from you.
Transactions in
Cryptocurrency are 100% anonymous. So nobody will ever know who made the
payment and who received it.
In other words, hacking bitcoin
transactions is almost impossible. Moreover, there is almost no chance that the
transactions in Bitcoin can be faked. All thanks to this amazing technology
called BLOCKCHAIN.
However it is important to
note that, it is also impossible to reverse the payments made using bitcoins. Obviously
because there are no regulators of Bitcoin.
Bitcoin is divided into
“Satoshi” which is 10 crore’th part of a bitcoin just like we divide Ruppee
into paisa which is 100’th part of rupee
In INR, One Bitcoin is worth
approx Rs.5,20,000 ($8000) today.
So when we buy/sell bitcoin
in small amount, we use satoshi like we use grams for sale/purchase of gold
instead of kilograms due to its high value.
Why
it is an asset and not a currency
Bitcoin can be used to make
payments and settle payments still there are two prime reasons why Bitcoin can’t
be considered as ‘Currency’, unstable value and slow transaction time.
Unstable Value- The most
important feature of a currency is that it holds value which should be stable
in nature. Here is 30 days price chart of Bitcoin in INR-
Nobody wants investments or
debts denominated in a currency whose value itself changes by more than 80% in
3 months.
Slow Transaction Time- Although
to protect the security, blockchain technology is used that makes it so secure,
yet processing of Bitcoin transactions is very slow. Sometimes it takes several
days to complete a simple transaction due to the limit on number of
transactions which can be completed in a day.
Given these drawbacks, the Bitcoins
cannot be considered as a currency, but an asset like gold and silver which is
used to speculate or to mask transactions from others.
Legal
Position of Bitcoins in India
As on date, bitcoins are
neither legal nor illegal. Moreover, it is not a legal tender in our country,
as per the guidelines issued by RBI in this regard.
RBI had already issued a
disclaimer saying that any person dealing with virtual currencies would be
doing so at his own risk and recently RBI also said that bitcoins will not be
used for making payments and settlements.
Taxation
of Bitcoins in India
Even though Bitcoins are not
specifically mentioned in the income tax act, yet gains arising due to bitcoins
are taxable in India because of the wide definition of income under Section 2(24)
under Income Tax Act which means every kind of income is taxable unless clearly
exempt and given the wide nature of definition of capital assets under Section
2(14) and definition of business under
section 2(13) of the Income Tax Act, the
purchase of bitcoins, if it has been made for the purpose of investment, should
be treated as a capital asset Thus, any gains arising on transfer/sale should
be characterised as capital gains and trading in bitcoins are regarded as
business and consequently profits and gains arising due to it, chargeable under
the head of “Profits and Gains from business and profession”
To check whether bitcoins
are held as investment or stock in trade, we need to go through various
parameters like frequency of trades, other sources of income etc which we use
in classification of income from shares as capital gains or business income.
Generally Bitcoins is
considered as capital asset which is usually owned to earn from appreciation in
its value. So if the gain is short term i.e. bitcoins are transferred/sold
within 3 years of acquisition, it is taxable as per your applicable slab rate.
If gain is long term i.e. bitcoins are transferred/sold after 3 years of
acquisition, it is taxable at 20% and benefit of indexation of cost is
available in this case. So your gain will be Sale consideration less cost of
such bitcoins (Indexed cost in case of long term capital gains).
Where there are too many
trades in Bitcoins then you are treated as a trader and this income will have
to be reported as income from business and it will be taxable as per your slab
rates. You can claim all expenses which are incurred wholly and exclusively for
trading eg. Internet Bill, Depreciation on Laptop etc.
This income can also be
treated as “Income from Other Sources” but I strongly recommend to not to report
it as “Income from Other Source”