Taxation of Crypto Currencies


Taxation of Crypto Currencies


CA. Vedant K. Parikh




Genesis of all the cryptocurrency came from Bitcoin. Bitcoin was the first crypto currency developed by pseudonymous computer programmer “Satoshi Nakamoto”. According to Investopedia, “A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers. A defining feature of cryptocurrencies is that they are generally not issued by any Central authority, rendering them theoretically immune to government interference or manipulation”.

According to statista, market capitalisation of bitcoin was600 billion US $ in March, 2021 which increased to 1000 billion US $ in May, 2021. Surprisingly, this market capitalisation (cap) is more than market cap of many listed companies in India.

Currently, there are more than 5400 cryptocurrencies which are traded across the globe. Further, out of cryptos traded, the market cap and price are unbelievable in case of 10 currencies’ as on May 2, 2021. From total market capitalization of cryptocurrencies, Bitcoin represent at least 40% to 60% of market capitalization.

Lets have a bird eye view of the Crypto Strata:



Need of Crypto Currency

The salient feature that makes crypto the most favourable instrument for trading is its cinch exchange across the globe without or with minimal cost.Today, one must undergo a lengthy compliance procedure for exchange of funds cross border involving high cost.The procedure and cost factor gets involved due to the presence of various factors including intermediary to execute these transactions, privacy, security,virtual currency etc.

Acceptance of Crypto as Official Currency ?

There may be question in our mind that if cryptocurrencies are that much useful than why governments and financial institutions across the world are reluctant to legalise and normalise use of cryptocurrency ?

There are various reasons for not legalising the use of cryptocurrencies. As crypto does not have any regulatory authority and it’s semi-anonymous nature they are well suited for illegal activities, smuggling, money laundering, tax evasion. Here it’s advantage is becoming it’s disadvantage and due to that reason many authorities are not accepting. Also, the school of thought is that it is a threat to the existing financial system and law. Certain other concern to cryptocurrencies is it’s fluctuating price band due to which its believed that it does not represent correct price of the currency.

Also many countries had stopped mining activities of cryptocurrencies due to heavy use of electricity. According to news in India Today, Iran which contributes 4.5% of total Bitcoin Mining activity in the world had stopped mining for four months due to blackouts in various cities of Iran which could disrupts lives and businesses. According to an article in,bitcoin mining activity solely consumes more electricity than entire UAEs electricity requirement and the same is viewed as the biggest threat forcarbon emission in future. The other factors for non-acceptance of crypto includes security of wallets, private keys, and incidence of frauds in the name of cryptocurrencies.

Dealing in Crypto

One may have question that how can I deal in cryptocurrency. There are three ways to deal in cryptocurrency.

  1. Mining of cryptocurrency
  2. Purchase of cryptocurrency from crypto exchange
  3. Receive cryptocurrency as a consideration

Miner of cryptocurrencies are who get cryptocurrencies into circulation and first user of cryptocurrency. More than 300 crypto exchanges are working across the globe and millions of users are taking services from these exchanges for trading in cryptocurrency. Now companies like Microsoft, Tesla have already started accepting some cryptocurrencies as a consideration but the same is popularly used as an investment or trading tool.

Cryptocurrencies and Blockchain technology is entering into second decade and now it is clear that they are not going away and every country if they like or not have to adjust somewhere. In 2018, while presenting union budget the finance minister stated that “The government will take measures to eliminate use of crypto-assets in financing illegitimate activities or as part of the payment system.The focus, however, would be on the distributed ledger system or blockchain technology that allows organization to record and authenticate transactions without the need of intermediaries”.This statement shows the governments intent that they are not against the growing technology. Many countries including China &Japan had cracked down on cryptocurrencies, but they are not ignoring technology. Apart from that,Federal Bank of many countries are introspecting the introduction of digital & virtual currencies.

Having said and understood about the CRYPTOs, its not incorrect to say that whether anyone like or not cryptocurrencies are not going away. To add on, one should take a step forward and do brainstorming about the accounting treatments and taxation to avoid future disputes.



Income tax on cryptocurrency

According to Section 5 (Scope of total income) of Income Tax Act, 1961 (here after referred as “the Act”), any income from any sources is taxable in India. Further, Section 2(24) of the Act, defines income which is inclusive in nature. Accordingly, there is no specific definition of income. Under Section 14 of the Act, calculation of total income is broadly classified in five heads which are as follows:

  1. Income from Salary
  2. Income from House Property (HP)
  3. Income from Profit & Gain from Business or Profession (PGBP)
  4. Income from Capital Gain (CG)
  5. Income from other sources (IFOS)

Accordingly,the income earned would be taxed under the five heads of incomebased on its nature. Further, to tax any incomefollowing factors are to be considered:

  1. Motive of the assesse
  2. From where and how income is earned
  3. From which Asset Class income is derived
  4. Conduct of the assesse
  5. Activity of the assesse

There exists other factors too, but above mentioned are some of the prime factor for considering nature of income.

To tax income from cryptocurrency under respective head, firstly we need to understand what the motive of the assessee is, how and from which asset classthe income is derived as all the incomes are taxable except which are specifically exempt.Accordingly, income from cryptocurrency is taxable but the problem is about identification of the head of Income under which it would be taxed.

Talking about India, many people have doubt about legality of the crypto but the Act does not differentiate the charging of tax on the basis of legality of the income.

Lets Elucidate with a Flowchart

Want to know under which head your income from cryptocurrencies will be taxed? It is very easy !! Follow the flow chart to have your answer.


Select from following transactions which is yours?

Lets Elucidate with Case Studies

We would look at different scenarios where dealing in cryptocurrency are due to various motives/reasons.

Case Study – 1

A Ltd. Indian company is providing software services across India and is also exporting to various countries. A Ltd. has decided to accept receipts for providing services in form of crypto i.e. crypto is accepted as consideration for sale of services or goods.In the given scenario, how A Ltd.’s income will be taxed if A Ltd. hold that crypto?


Crypto is not legal tender or any foreign currency, cheque, promissory note, bill of exchange, letter of credit, electronic remittance or any other type of instrument which is recognised by Reserve Bank of India. In the given case, A Ltd. is getting Crypto as a consideration for sale in kind and accordingly it is accounted based onmotive of its use and taxed.

Motive to use Crypto to Incur Expenditure

If A Ltd. has motive that certain expenses can be done by transfer of crypto than in that case accounting for crypto should be done as an inventory and taxed accordingly. Any gains from this would fall under income from PGBP.Accordingly, gain or loss would be determined based on fair market value of goods or services purchased against fair market value of goods or services sold.

Motive to use Crypto as Capital Asset

If A Ltd.’s motive is to use crypto as a capital asset and not as a stock in trade, in that case capital gain will be taxed.CG would be calculated by reducing cost of acquisition or indexed cost of acquisition against Net sale consideration.Income from CG depend upon whether cryptocurrency is capital asset under section 2(14) of the Act or not. According to that definition, property of any kind held by assessee is capital asset and the definition is very wide in nature. However, if it is not considered as capital asset than it would be taxed under section 56 of the Act as IFOS.

Case Study – 2

Mr. Y is dealing in crypto at cryto exchanges for speculation purpose by trading in various cryptocurrencies. Here,the question arises that whether dealing in cryptocurrency at crypto exchanges will be considered as a speculative transaction under Income Tax Act, 1961?


According to subsection 5 of section 43 Speculative transaction means, a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips.

The above definition excludes:

  1. Hedging contract in respect of raw material or merchandise
  2. Hedging contracts in respect of stocks & shares
  3. Forward contract
  4. Trading in derivatives in recognised stock exchange
  5. Trading in commodity derivative in recognised stock exchange.

According to the above definition, trading in crypto will not fall under speculative transactions as it only covers transactions for commodity, stocks and shares and crypto is neither commodity nor stocks / shares / securities.

Though the nature of transaction is speculative, it will not fall under speculation natureconsidering the definition of speculative transaction. Income would be taxed as a normal business income under the head PGBP.

Case Study – 3

A Ltd. is using it’s computing power and having required infrastructure to mine crypto. Here question will arise how to tax persons who are involved in mining activities of cryptocurrency?


If A Ltd. is mining crypto, in that case it is to be taxed under the head PGBP. A mined cryptocurrency can be considered as a type of intangible software as miners also receive transaction fees for transaction taking place in crypto.  Profit for the cryptocurrency will be derived by deducting expenditure of mining activity from sale of mined cryptocurrencies and transaction fees. There may be argument that, why it is to be taxed under PGBP and not under other heads. My view is that crypto miners are in the business of generating crypto assets using their computers, power and would fall under definition of business which includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture.

Taking another viewmined cryptocurrency can be considered as self-generated capital asset. According to SC Ruling of CIT VS B.C.Srinivasa Shetty (1981), it is not possible to determine cost of self-generated capital asset so income from mining will not be taxed. It is difficult to expect from the Income Tax department to take this stand.

Also, it is to be noted that for recognising cryptocurrencies and to promote its use many sections of the Act is required to be amended. For an instance, section 269ST doesn’t allow taking consideration in any modes other than Account payee cheque, draft or electronic clearing systems provided by banks. Further, the penalty for non-compliance is also high.Similarly, there are various provisions which restrict assessee from dealing in cash transaction and promote transaction through banking channel.

Note: The content stated represents individual opinion and there may be difference in opinion, because CBDT has not provided any guidance or made any provisions for legality of dealing in crypto and taxation of crypto. Buzz about crypto across the world is increasing due its volatility, easy to trade and other benefits as discussed in the article. Further, Indian users of crypto are increasing leading to which we may expect governments intervention regarding trading of crypto, taxation, accounting, etc. To initiate, government may call for collection of data of persons / assessee dealing in crypto from exchanges and banks.


Section 2(24) Definition of “Income” under income tax act, 1961

Section 2(13) Definition of “Business” under income tax act, 1961

Section 2(14) Definition of “Capital Asset” under income tax act, 1961

Section 43(5) Definition of “Speculative transaction” under income tax act, 1961

Section 14 “Heads of Income” under income tax act, 1961

Section 28 of Income tax Act is charging section for income from “profits and gains from business and profession”

Section 45 of Income tax Act is charging section for “Income from Capital Gain”

Section 56 of Income tax Act is charging section for “ Income from other sources”


GST on dealing in cryptocurrency

The buzz continues to the applicability of GST on Crypto transactions. The solution to the buzz can be identified by whether dealing in crypto will lead to supply under section 7 of CGST Act, 2017 or not?

Lets Elucidate Technical Jargons under various Acts:

Reference of the Section Interpretation
Supply under Section 7 of the CGST Act, 2017

(1) For the purposes of this Act, the expression “supply” includes––

(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;


According to section 7, supply is inclusive term which means supply includes all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business.

To determine Supply following test is required to be passed:

·       Whether Cryptocurrency is goods or Service?

·       Whether there is consideration involved?

·       Whether it is for the purpose of business?


Section 2(52) “goods” means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply.


According to definition movable property is considered as goods but cryptocurrency is not a movable property it will not fall under that definition. According to definition money or securities are not considered as goods and definition of money is also provided in CGST Act, 2017.


Section 2(75) “money” means the Indian legal tender or any foreign currency, cheque, promissory note, bill of exchange, letter of credit, draft, pay order, traveller cheque, money order, postal or electronic remittance or any other instrument recognised by the Reserve Bank of India when used as a consideration to settle an obligation or exchange with Indian legal tender of another denomination but shall not include any currency that is held for its numismatic value

Section 2(h) of FEMA Act, 1999 “currency” includes all currency notes, postal notes, postal orders, money orders, cheques, drafts, travellers cheques, letters of credit, bills of exchange and promissory notes, credit cards or such other similar instruments, as may be notified by the Reserve Bank;


As provided in above definition to consider crypto as money, it should be legal tender in India recognised by Reserve Bank of India and should be used as consideration to settle the obligation. Further, according to this definition any currency held for getting its numismatic value is not considered as money instead considered as goods. As cryptocurrency is not legal tender and not falling under any other category so it should not be considered as money.


Section 2(h) of Securities contracts (regulation) Act, 1956, securities” include— (i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;


Definition of securities is according to definition of securities provided in Securities contracts (regulation) Act, 1956. According to that cryptocurrency is not considered as security, as it does not have value from any body corporate and there is no obligation against its value.

As cryptocurrency is not goods, it has to pass test of service.


Section 2(102) “services” means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged;

Explanation.- For the removal of doubts, it is hereby clarified that the expression “services” includes facilitating or arranging transactions in securities;.”


Definition of service is very simple which says that anything other than goods, money and security is service. We have already checked that cryptocurrency is not money or security or goods. It clearly indicate that cryptocurrency is service according to GST law.

Following other test is required to be passed to determine whether dealing in cryptocurrency is supply or not.

To consider as supply first condition is it should be goods or service. If it is goods or service, than it should be checked that whether there is transfer through sale, barter, exchange, etc. for consideration.


Section 2(31) “consideration” in relation to the supply of goods or services or both includes––

(a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;

(b) the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government:

Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply


According to definition, consideration includes any payment made or to be made for goods or services an on sale of cryptocurrency the seller would receive payment against that sales and that will fulfil the definition of consideration.

The additional condition to be fulfilled is that the transaction should have been done for the purpose of business or furtherance of business.


Section 2(17) “business” includes––

(a) any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit;

(b) any activity or transaction in connection with or incidental or ancillary to sub-clause (a);

(c) any activity or transaction in the nature of sub-clause (a), whether or not there is volume, frequency, continuity or regularity of such transaction;

(d) supply or acquisition of goods including capital goods and services in connection with commencement or closure of business;


As definition of business is very wide, dealing in cryptocurrency will be considered as business.



According to above analysis activity in cryptocurrency will fall under supply will be considered as supply under the CGST Act, 2017. Further, this supply neither falls under negative list nor exempt by any notification and hence, GST may be levied on sale or transfer ofcryptocurrency.


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