Beginners’ Guide to Bitcoin Tax Reporting

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Bitcoin is a form of cryptocurrency, each Bitcoin is a digital asset stored in a digital wallet that can be accessed from a smartphone or computer. You can use these digital wallets to send Bitcoin or part of a Bitcoin to other people through their digital wallets. Every transaction made with Bitcoin is recorded in a public ledger called blockchain.

What is a cryptocurrency?

Cryptocurrency is a form of virtual currency that uses strong cryptography to secure financial transactions and regulate the production of the currency. Cryptocurrencies are developed on the blockchain system, therefore, there is no central control or administrator of the system. The system is regulated by its users as the network is based on consensus.

What is Blockchain?

Blockchain is a time-stamped series of digital data that are immutably linked to one another through strong cryptography. The data is distributed and managed by a cluster of computers within the network called nodes. An open blockchain network is a decentralized system, which means that there is no central control. Since blockchain is based on the distributed ledger system the information within the ledger is open to the public to view.

History of Bitcoin

Bitcoin was the first digital cryptocurrency to come into existence, it was created by a programmer or a group of programmers that go by the name of Satoshi Nakamoto. Satoshi Nakamoto was concerned with the level of reliance on the trustworthiness that the present financial system operates on to function properly. Nakamoto proposed the Bitcoin, this currency could theoretically serve as a medium of exchange without any centralized authority like banks or governments to regulate it. The proposal was made in October 2008 in a paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System” which was posted on bitcoin.org.

How do transactions work?

Bitcoin relies on public-key cryptography, this system gives the user a public-key that everyone on the network can see and a private key that is only known to the user’s computer. When a Bitcoin transaction is taking place the user receiving the Bitcoins will send their public key to the user sending the Bitcoin. The sender will sign the receiver’s public key with their private key and the transaction will be recorded in the Bitcoin network. So that no Bitcoin can be sent more than once at a time each transaction is recorded and time-stamped, these transactions are stored on a distributed ledger at each node of the network. There are so many Bitcoin tax software which consequently run these computations for you and give you a total crypto tax report to provide for the expense man.

Transactions are clubbed together in groups called blocks. These blocks are attached to other blocks in a cryptographical sequence and adding a block to the chain requires a complex mathematical process making it next to impossible to hijack.

Bitcoin in India

The Reserve Bank of India (RBI) has been very skeptical about Bitcoins being used in India, and as of April 2018, the RBI has directed all entities regulated by it to not facilitate any transactions related to Bitcoin. This included services like maintaining accounts, trading, registering, settling, clearing, accepting Bitcoin as collateral for loans, transferring or receiving money in accounts related to the sale or purchase of Bitcoin, and the opening of accounts for exchanges dealing in Bitcoin. 

Even though the RBI is very skeptical about Bitcoin, it has favored the technology that underpins Bitcoin, Blockchain. In a report in 2017, the RBI recommended the development of a national digital currency similar to the model adopted by Canada. The government favors the accuracy of blockchain when it comes to record-keeping and has slowly started to implement this system. The state of Andra Pradesh has deployed blockchain technology across its administration. 

Bitcoin Tax India

Since there is a complete ban on Bitcoin in India there are no solid tax regulations in place, and all information relating to Bitcoin Tax is purely speculative. There are three main instances when income from Bitcoin may be taxed. 

  • Receiving payments in Bitcoin

  • Transfer of Bitcoin to Fiat currencies

  • Mining of Bitcoin

Receiving payments in Bitcoin

Many small and medium-sized businesses in India receive payments for goods and services provided by them in the form of Bitcoin. This is mainly due to the cost-effectiveness and security Bitcoin transactions offer.

When a business receives payment in the form of Bitcoin for goods or services provided by them, taxes may be charged under the head of Income from Business Activities, and the appropriate taxes on this transaction, in accordance with the relevant tax slab will be levied.

Transfer of Bitcoin to Fiat currencies

The tax levied on the transfer of Bitcoin to fiat currencies depends on the duration for which the Bitcoins were held. If the Bitcoins being transferred were held for a period longer than 36 months they would be considered long-term assets, and any profits or gains accumulated during the transfer will be charged under the head of Long-Term Capital Gains. Long-Term Capital Gains are taxed at a flat rate of 20%. If the Bitcoins are held for a period shorter than 36 months they are considered short-term assets, any profits or gains arising from the transfer of these Bitcoins will be taxed under the head of Short-Term Capital Gains and will be taxed in accordance with the individual’s tax slab.

However, if Bitcoins are transferred frequently for the purpose of generating profits, the income generated from such operations will be considered income from business and will be taxed under the head of Income from Business Operations. 

Mining of BItcoin

Bitcoin mining is a capital intensive activity, which requires a lot of energy and expensive hardware. Even though there is a significant capital investment required to mine it, Bitcoin mining is considered a self-generating asset. Section 55 of the Income Tax Act, 1961 dictates the calculations required to ascertain the cost of acquisition of a self-generating asset, but this does not include Bitcoin. If Bitcoin mining was to be taxed it would probably be calculated in accordance with Section 55 of the Income Tax Act, 1961.

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Prateek Kulhari
Prateek is a business editor who writes about various topics such as technology, health and finance. At Pressly, he works along with the colourful folks that build a nation through tech startups. He is also a professional football player and video games enthusiast.

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