Income Tax Considerations in Bitcoins

One of the doubts that the Bitcoin community in India face is its taxability. They wonder how will the Income Tax department treat Bitcoin transactions for tax purpose.

While it is the prerogative of the Income Tax department to interpret the taxability in whatever manner they think fit, our views on the same are as follows.

1. A Merchant receiving Bitcoins as revenue:

When a merchant receives Bitcoins either online or offline in exchange of his services, the Bitcoins will become part of his revenue. In the event he converts it into Rupees before the end of the financial year, the realized value may be booked just like any rupee sales.

If there is a  time gap between the date of sale and the date of conversion, the value of the Bitcoin might have varied during this period and it is open to the IT (Income Tax) department to treat the value on the date of sale as the realized sale proceeds and the difference upto the date of conversion as “investment profit/loss”. There can therefore be a business revenue and short term gain or loss on investment.

In other words, if the seller has a quote for his services in Rupees as on the date of the sale, the IT department can consider it as the “Notional Sale Value” and the difference in the  actual realized sale value as short term gain/loss.

In case the merchant does not convert the Bitcoin holding into rupees before the end of the financial year, he may declare it as an “Inventory” of “Stocks” and value it in terms of rupees using any of the exchange rates available in major Bitcoin exchanges. If IT department wants to be harsh, it may take the highest quote of the day for valuation. If they are reasonable, they may accept the weighted average price of a basket of quotes from top exchanges. The constitution of the basket needs to be decided.

The Merchants may file their returns on the basis of the US dollar quote from MtGox converting the dollar to rupee as per their Banker’s dollar purchase rate and let the department dispute the valuation if they want.

If a trader receives Bitcoins and then sells it in an exchange and realizes a foreign currency and then converts the foreign currency back to rupees, the transaction may be deemed as an “Export”. The exchange will be paying in fiat currency on behalf of the buyer though the choice of the exchange was that of the Merchant.

This transaction may have similarity to a situation where a buyer says “I will receive the goods through a courier but the Merchant can decide on which courier to use”. A delivery of goods in such case will be acceptable as a constructive delivery when the goods are handed over to the courier by a Merchant. Similarly the trader uses MtGox at his choice for exchange of Bitcoins to dollars but Mt Gox may be deemed to exchange the Bitcoins to dollars at the instance of the buyer rather than the Merchant.

2. Traders/Investors

Trading in Bitcoins is like any other commodity trading and the profits and loss are computed on the basis of cost of purchase plus related expenses and the realized or realizable value (as discussed in the previous paragraph).

If a person buys Bitcoins by paying in any currency other than Rupee, then it would amount to an “Import” of Bitcoins. To the extent Bitcoin may not be in the restricted list of imports it may be considered that the import does not require specific license. However the call has to be taken by the Authorized dealer who coverts the rupee to the foreign currency.

3. Miners

Mining of Bitcoins is deemed as a “Production Activity”. It will generate Bitcoin stocks which will have realizable value as discussed earlier. There will be a cost of production that includes direct expenses if any and the depreciation of computers and other resources used.

If the mined coins are sold, it may be either a domestic sale or an export. If it is held as inventory at the end of the financial year, then the usual rules regarding advance taxation based on the realizable value or on cash basis on sale can be adopted.

Probably more clarity will emerge as the days go by.

Naavi

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About Vijayashankar Na

Naavi is a veteran Cyber Law specialist in India and is presently working from Bangalore as an Information Assurance Consultant. Pioneered concepts such as ITA 2008 compliance, Naavi is also the founder of Cyber Law College, a virtual Cyber Law Education institution. He now has been focusing on the projects such as Secure Digital India and Cyber Insurance
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