What is the Income Tax on Bitcoin in India?
- Bhavika Rajput
- 3 hours ago
- 6 min read
Among the most widely used cryptocurrencies is Bitcoin. All cryptocurrencies are regarded as virtual digital assets for the purposes of income tax. Regarding the taxation of these virtual digital assets (VDA), the act has distinct requirements. When cryptocurrency is sold, it is subject to a flat 30% tax. Only the cost of the purchase may be deducted; no other deductions may be taken. In essence, virtual digital asset income is considered a capital gain. Bitcoin mining, airdrops, and cryptocurrency giving are other activities than sales, and each has a different tax impact. Whether you are a bitcoin beginner or someone who already has experience in the domain, you must understand how bitcoins are treated tax-wise for each kind of activity.
Table of Contents
Understanding Cryptocurrency
Before discussing the taxability of bitcoin in India, it is crucial to understand the meaning of cryptocurrency because bitcoin is one. Digital currency that is thought to be more secure than actual currency is called cryptocurrency. Cryptography is a technique used by cryptocurrency to protect its transactions. The process of transforming understandable data into complex, difficult-to-crack codes is known as cryptography. A subset of digital currencies, alternative currencies, and virtual currencies is categorised as cryptocurrencies.
What is Bitcoin?
One of the first cryptocurrencies, Bitcoin, is a component of the global peer-to-peer payment system. The number of cryptocurrencies that have since been developed has rapidly increased; notable examples include Litecoin, Ethereum, Zcash, Dash, Ripple, and others. In India, Bitcoin has begun to gain traction due to the government's efforts to transition to a cashless economy. Additionally, it has increased by over 30% after Donald Trump won the US presidential election on November 5, 2024, making it the greatest amount ever. This boom has been quite beneficial to investors. Keep in mind that taxes on virtual digital assets (VDAs) in India function differently from those on more traditional investment products like stocks and mutual funds if you have a sizable Bitcoin investment and wish to profit from this largest cryptocurrency. Unlike the RBI, which manages actual currency in India, they are neither governed nor controlled centrally. Blockchain technology, which acts as a public ledger for all transactions, is used to manage peer-to-peer bitcoin transactions. Notably, the value of a bitcoin as of March 2024 was a staggering Rs. 58,86,000
What is Bitcoin Mining?
Bitcoins can be obtained in the following ways:
Mining: This is the process by which a person (referred to as the "miner") solves computationally challenging riddles by applying their computer skills. Maintaining blockchain technology is facilitated by the process of solving such riddles. The miner receives fresh bitcoins as payment for this, which is essentially the mining or creation of a bitcoin.
Using fiat money to purchase Bitcoin: Not everyone has the ability to mine Bitcoin. As a result, you might think about purchasing bitcoins from exchanges and keeping them digitally in an online wallet. Among the bitcoin exchanges operating in India are Unicorn, Bitxoxo, Zebpay, Coinbase, and others. These bitcoins would be bought with actual money, or fiat money.
Taking bitcoin in exchange for products and services: For the selling of goods or services they deal in, some astute businessmen take bitcoins (instead of actual currency), albeit this may not be a widespread occurrence in India at the moment.
Legality of Bitcoin in India
As of right now, there is no Indian law that expressly prohibits bitcoin transactions. Bitcoin transactions are not governed by any Indian legal authority, while being subject to taxation under the Income Tax Act. Therefore, even though cryptocurrency trade is legal, there are no rules governing it, and non-delivery cannot be brought to court. At news conferences, the Finance Ministry has stated time and time again that Bitcoin and other cryptocurrencies are not legal cash. Therefore, rather than being referred to as currency, such cryptocurrency might be regarded as an asset.
Applicability of Income Tax on Bitcoin in India
Section 115BBH, which levies a tax on profits from dealing in Bitcoin, virtual digital assets, and cryptocurrencies, was added by the Finance Act of 2022. The following points have also been clarified by the Union Budget 2022:
Digital assets, including cryptocurrency holdings, were formally classified by the government as "Virtual Digital Assets." The tax rate on income derived from the transfer of virtual digital assets, including cryptocurrency and NFTs, is 30%.
When reporting income from the transfer of digital assets, no deduction will be permitted other than the acquisition cost.
Digital asset losses cannot be carried forward or offset by other sources of revenue.
Giving digital assets as a gift will result in taxation for the recipient. One virtual digital currency's losses cannot be offset by those of another digital currency.
Starting on July 1, 2022, all sales of Virtual Digital Assets (VDAs), such as NFTs and cryptocurrencies, will be subject to 1% TDS.
Bitcoin Taxability in Different Scenarios
Case A: Tax on Bitcoin Mining
A collection of nodes or computers known as miners compete to solve challenging mathematical puzzles in order to validate transactions in a blockchain network. Depending on the network, the amount of cryptocurrency awarded to the first miner to solve the puzzle changes. A flat 30% tax will be applied to mining income. When calculating the gains at the time of sale, the acquisition cost for the cryptocurrency mining will be regarded as "Zero." The cost of air conditioning cannot include costs for things like electricity or infrastructure.
Case B: Tax on Bitcoin Received for Sale of Goods or Services
The tax treatment of receiving Bitcoin or another VDA in exchange for the sale of goods or services is expressly not specified by the recently established Section 115BBH. Nonetheless, the following rules apply when Bitcoin or VDA is received in return for the sale of goods or services. These sales of goods or services will be regarded as business and professional income. Such Bitcoin or VDA sales in the future will result in a capital gain or loss, which can be reported appropriately.
For instance, a freelancer bills his client Rs 20 lakhs. In return for their services, these clients contribute Rs. 20 lakhs in Bitcoin. After a few days, the freelancer sold the Bitcoin for Rs 22 lakhs and took the money out of his bank account. The following is how taxes can be calculated:
Particulars
| Amount
|
Income from Business and Profession | Rs 20 lakhs |
Capital gains from VDAs | Rs 2 lakhs |
Total taxable Income | Rs. 22 lakhs |
Case C: Bitcoins Being Held as an Investment and Exchanged for Actual Money
According to section 115BBH, Bitcoins held as investments are regarded as capital assets, and as such, gains on these assets are subject to a 30% charge. These assets' gains will be calculated under capital gains. The following table illustrates this scenario:
Particulars
| Value in Lakhs (hypothetical)
|
Number of bitcoins purchased | 10 |
Rs. equivalent of 1 bitcoin when buying | 91.5 |
Value of bitcoins (A) | 915 |
Rs. equivalent of 1 bitcoin when transferring | 79.85 |
Value of bitcoins (B) | 798.5 |
Capital gains (B - A) | 116.55 |
Case D: Bitcoins Being Held as Stock-in-Trade and Exchanged for Actual Money
The profits from such a business will be categorised under "Income from Business and Profession" since the income from bitcoin trading activity would result in income from business. You must choose the appropriate income type in Schedule VDA of the income tax form. According to Section 115BBH, a 30% tax will be applied, with no deduction for costs above the acquisition's direct cost.
Conclusion
Every transfer and transaction involving cryptocurrency in India, whether you're a trader, private investor, or just getting it as a gift, could be subject to taxes. Airdrops, mining, staking rewards, and cryptocurrency gifts are also taxable. With the exception of acquisition costs, no deduction is permitted. You can seek advice from an expert tax professional if bitcoin taxation sounds confusing to you.
Frequently Asked Questions
Is Bitcoin legal in India?
In India, bitcoin is not accepted as legal tender. However, Bitcoin or other VDAs is currently not prohibited by law. You can trade Bitcoin as a result.
Can I sell Bitcoin for cash in India?
Crypto exchanges that provide trading in Crypto-Coin or Crypto-Fiat pairs allow you to trade Bitcoin for cash.
How much tax is paid on Bitcoin?
All VDAs, including Bitcoin, are taxable at a rate of 30% u/s 115BBH. (Value-purchase at sale). Such gains must be reported in Schedule VDA's ITR 2 or 3.
How can I avoid tax on crypto?
The sale of crypto leads to a taxable capital gain. Section 194S-TDS on VDA, which was added by the Finance Act 2022, allows the income tax department to keep track of all cryptocurrency purchases and sales made in India. Your Form 26AS and AIS will reflect this information. In India, there is no way to avoid paying taxes on cryptocurrency.
What happens on the sale of Bitcoin?
You can sell Bitcoin for fiat money or another cryptocurrency. Declaring such a transaction in your income tax return is crucial from a taxation standpoint. When bitcoin is sold on an exchange, the exchange will also deduct TDS, which will appear on your Form 26AS and AIS report.
How can Bitcoins be transferred to a bank account?
Bitcoin can be sold on Indian exchanges that comply with FIU. You can withdraw the INR to your Indian bank account after selling the Bitcoin for Fiat (Rs).
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