INDIA AT THE VERGE OF CHOCKING IT’S

CRYPTOCURRENCY ECOSYSTEM DUE TO DREAD OF

UNSPECIFIC TAXATION LAW.
By- Shashank Diwakar1
1. Introduction:
Cryptocurrency is recognized as the popular virtual currency in the global world.
Although it is a debatable topic that weather cryptocurrency is a kind of property or a
currency. Cryptocurrencies are a form of digital asset that typically include peer-to-peer
transactions outside the central platforms of typical financial institutions. The dealings in
cryptocurrency are protected through encryption and count on a blockchain, which in
essence is a pool of continually mounting records on a digital ledger,2 no central authority
of middleman is involved in it.
In 2017, the value of a bitcoin, the world’s best known virtual currency, rose from about
$900 at the start of the year to approximately $20,000 by December. 3 This was the
historic rise in price of bitcoin.4 Bitcoin is the first enactment of a concept called
"cryptocurrency", which was first introduced in 1998 by Wei Dai on the cypherpunks
mailing list, proposing the idea of a new form of legal tender that uses cryptography to
control its creation and transactions, rather than a central authority. The first Bitcoin
description and evidence of concept was published in 2009 in a cryptography mailing list
by Satoshi Nakamoto. Satoshi left the project in late 2010 without enlightening much
about himself. The community has since grown exponentially with many developers
working on Bitcoin.5
This paper is basically concern about how the cryptocurrency is important for an Indian
economy and how the block chain process can positively effect the standards of Indian

1
Author- Shashank Diwakar, 4th Year, B.Com LL.B(Hons.), Faculty of Law, Dr. ShakuntalaMisra
National Rehabilitation University, Lucknow. Email id- (shashankdiwakar06@gmai.com)
2
Cameron Cooper , Bitcoin taxation: a global challenge for tax authorities, (01 Apr 2018)
https://www.intheblack.com/contributors/Cameron-Cooper
https://www.intheblack.com/articles/2018/04/01/taxation-bitcoin-global-challenge
3
From $900 to $20,000: Bitcoin's Historic 2017 Price Run Revisited
https://www.brrcc.org/current-value-of-bitcoin-in-dollars/ (13 October 2018, Saturday)
https://www.coindesk.com/900-20000-bitcoins-historic-2017-price-run-revisited/
4
Supra 2
5
https://bitcoin.org (official website of bitcoin community)
economy. Another crux related aspect of the paper is, Unspecific, unexpressed and vague
taxation laws in terms of crypto currency due to which Mafias are free to preserve there
black money & on the contrary side India is at the verge of choking its crypto currency
ecosystem due to dread of unspecific taxation law. So, what may be the solutions to
overcome from these hurdles and how Indian economy can rapidly grow by opting crypto
currency as a legal tender.

2. Historical Background:
In 1983 the American cryptographer David Chaum considered an anonymous
cryptographic electronic money called e-cash.6 Afterwards, in 1995, he implemented it
through Digicash, i.e. Digital-Cash.7
In 1996, the NSA published a paper enabled How to Make a Mint: the Cryptography of
Anonymous Electronic Cash, describing a Crypto currency system first publishing it in a
MIT mailing list.8 and thereafter in 1997, in The American Law Review (Vol. 46, Issue
4).9 Then in 1998 by Wei Dai described the first implementation of a concept called
"cryptocurrency", on the cypherpunks mailing list.10 The first Bitcoin requirement and
proof of conception was published in 2009 in a cryptography dispatching list by Satoshi
Nakamoto.11 On 6 August 2014, the UK proclaimed its Treasury had been commissioned
to do a study of cryptocurrencies, and what part, if any, they can play in the UK
economy. The research was also to report on whether regulation should be considered or
not. In the history and in this era bitcoin is the only cryptocurrency which is popular
among the entire world.

3. Where does bitcoin come from or how is it generated?

One can obtain bitcoins either by :

6
David Chaun, Department of Computer Science, University of Calefornia, Santa Barbara, CA BLIND
SIGNATURES FOR UNTRACEABLE PAYMENTS
7
Julie Pitta, Requiem for a Bright Idea (FOREBS 2018)
https://www.forbes.com/forbes/1999/1101/6411390a.html#2bab9a82715f.
8
"How To Make A Mint: The Cryptography of Anonymous Electronic Cash". groups.csail.mit.edu.
(11/01/2018.)
9
Laurie, Law,; Susan, Sabett,; Jerry, Solinas, "How to Make a Mint: The Cryptography of Anonymous
Electronic Cash". American University Law Review. 46 (4). (12/01/ 2018.)
10
Frequently Asked Questions, Bitcoin, https://bitcoin.org/en/faq#general.
11
Ibid.
 3.1 Mining.
Mining is an activity where an individual (called the “miner”) uses his computer powers
to crack computationally difficult puzzles. The procedure of cracking such puzzles which
are essential to the blockchain technology, help in maintaining them. As an incentive for
this, the miner gets new bitcoins which is nothing but formation of a bitcoin by mining.12

3.2 Purchasing a bitcoin exchange against real currency.

Although everyone can be a bitcoin miner but it requires a worth of technical skills or
knowledge. Hence, anyone can consider buying bitcoins from bitcoin exchanges and
store them in an online bitcoin wallet in digital form. Unicorn13, Bitxoxo, Zebpay,
Coinbase etc. are some of the bitcoin exchanges platforms in India working as a third
party between buyer and seller of bitcoin. Such bitcoins are purchase in consideration for
real currency. It will be interesting to note that in some past period of 4-5 months, the
value of 1 bitcoin is approximately about INR 3,98,643.30.

3.3 Receiving bitcoins in consideration of selling goods or services.

Though this may not be a communal phenomenon in India currently, there are few
practicality businessmen who accept bitcoins (instead of real currency) on sale of goods
or services, they deal in.

4. Is bitcoin legal in India?

As earlier discussed, bitcoin, as a standard of payment, has neither been authorized nor
been controlled by any central authority in India. Supplementary, no set rubrics,
regulations or guidelines have been laid down for resolving quarrels that could rise while
dealing with bitcoins. Hence, bitcoin businesses come with their own set of risks.
However, given this background, it cannot conclude that bitcoins are illegal as, so far,
there has been no ban on bitcoins in India.

12
Supra 11.
13
Unicorn, https://www.unocoin.com/
5. Scenarios regarding bitcoins taxatation in India.
The concept of bitcoins being new to the Indian market, actually the government has not
yet introduced taxability of bitcoins into the statute books. At the same time, imposition
of tax on bitcoins cannot be ruled out because the Indian income tax laws has always
sought to tax income received regardless of the form in which it is received. Therefore,
the likelihood of tax on bitcoins can be looked at under the following circumstances:

5.1 Scenario A: In the Case of BitCoin Mining:

Mining is the process of indulging computing power to process transactions, secure the
network, and keep everyone in the system synchronized composed. It can be perceived
like the Bitcoin data center excluding that it has been designed to be entirely
decentralized with miners functioning in all countries and no individual having control
over the network. This procedure is referred to as "mining" as an analogy to gold mining
because it is also a temporary mechanism used to issue new bitcoins. Unlike gold mining,
however, Bitcoin mining offeres a reward in exchange for useful services required to
operate a secure payment network.14
There is little doubt that cryptocurrencies reflects unique challenges for tax authorities.
One of the key debates has been around whether cryptocurrency traders are earning
personal services income, or whether they should pay capital gains tax.15 Bitcoins
generated by mining are self-generated capital assets. Subsequent sale of mined bitcoins
will, in the normal course, give rise to capital gains. However, the cost of acquisition of a
bitcoin cannot be consider as it is a self-generated asset. Further, it will also not fall under
the provisions of Section 55 of the Income-tax Act, 1961 which specifically states the
cost of acquisition of certain self-generated assets. Therefore, the capital gains
computation instrument fails following the Supreme Court decision in the case of
B.C.Srinivasa Shetty. Hence, no capital gains tax will be consider arise as on mining of
bitcoins. This situation will be hold till such extent up till the government thinks of
coming up with an amendment to Section 55 of the Act.16

14
Ibid.
15
Cameron cooper, Bitcoin taxation: a global challenge for tax authorities, In the Black,
https://www.intheblack.com/articles/2018/04/01/taxation-bitcoin-global-challenge.
16
S. 55, The Income Tax Act,1961.
Hence, government of India is in dread of specific Tax laws regarding the transactions of
Cryptocurrency.

5.2 Scenario B: Bitcoins held as an investment being transferred in exchange for

real currency
If bitcoins, which are considered to a capital assets, have been held as an investment and
are transmitted in exchange for real currency, the gratitude in value would give rise to a
long term capital gain or a short term capital gain relying upon the period of holding of
the bitcoin. Further, long term gains will be taxed at a flat rate of 20%17 while short term
gains will be taxed at the individual slab rate. The cost of attainment for arriving at long
term capital gains will be determined after giving the benefit of indexation.
Reiterating the probable contrary view of the income tax authorities discussed above, the
IT experts may not consider Bitcoins as a capital asset and hence the laws of capital gains
would not apply. Accordingly, the income tax authorities may select to tax the gains from
bitcoins under the head “Income from other sources”. Further, if the income gets taxed
under the head of “Income from other sources”, the assesse would have to pay taxes at a
rate as applicable to the tax slab he falls under. For example, if his taxable income
exceeds Rs 10 lakh, he would be liable to a tax @ 30% as in reference to the flat rate of
tax of 20% he would be liable to pay, if charged to tax under long-term capital gains. The
advantage of indexation as would be available if taxed under capital gains, would also not
be available if taxed under the head of Income from other sources.

5.3 Scenario C: Bitcoins held as stock-in-trade being transferred in exchange for

real currency
The income arising out of bitcoins trading actions would give rise to income from
business and accordingly, the revenues arising out of such business would be subject to
tax as per the individual slab rates.

17
Sooraj Goel, Here's how to calculate tax payable on your capital gains ,The Economic Times,
https://economictimes.indiatimes.com/wealth/invest/heres-how-to-calculate-tax-payable-on-your-capital-
gains/articleshow/54932358.cms,
 5.4 Scenario D : Bitcoins being received as consideration on sale of goods and
services.
Bitcoins being conventional so shall be treated on par with receipt of money. It would
establish income in the hands of the recipient. Further, since the recipient received this
income out of a business or profession, he would be levied taxed, normally, under the
head profits or gains from business or profession. As regards the revelation requirement
of bitcoins in the income tax return forms, there endures to be a lack of clarity. Very
recently, our Finance Minister, Mr Arun Jaitley, on being asked to comment on any
decision proclaimed to be taken as regards crypto currency in general, has commented
that, “Recommendations are being worked at. The government’s spot is clear, we don’t
recognize this as legal tender as of now,”.18 Further, the Central Bank also has preferred
to reinforce its earlier message to “users, holders and traders of Virtual Currencies
(“VCs”) including bitcoins regarding the potential economic, financial, operational, legal,
customer protection and security related risks associated in dealing with such VCs.”
Therefore, considering that bitcoin communications are gradually picking up in India,
while, laws regulating them are knowingly absent, we are hopeful that the government
will come up with a notification soon to dispel the ambiguity around the legality of
bitcoins, their taxability and revelation requirement of bitcoins. While this papers aims at
discussing the taxability of cryptocurrency only, the tax conduct on transacting with other
cryptocurrencies would also be similar to that in the case of Bitcoins.

5.5 Scenario E: Taxation of bitcoin sale by NRI:

If an NRI sells bitcoins on an Indian exchange. Would he be liable for taxation in Indian
economy? Since bitcoin is an intangible asset, income accruing or arising from its
transfer outside India by a person who is not a resident in India i.e. NRI cannot be taxed
in India. Hence, sale of bitcoin by an NRI through an Indian bitcoin transactions may not
be taxed in India.
5.6 Scenario F: Situs (location) of bitcoins for taxation:

18
The Times Of India, Govt doesn't recognise crypto currency as legal: Jaitley ,
https://timesofindia.indiatimes.com/business/india-business/govt-doesnt-recognise-crypto-currency-as-
legal-jaitley/articleshow/61868822.cms.
 Bitcoins are intangible assets. For income tax purposes, situs of an intangible asset can
differ according to its nature and obligations attached to it. Situs of an intangible property
is decided on the basis of the law of the land where guard for the property is sought.
Situs of an intangible asset can be related with such tangible property with which it is
most closely connected. For example, a patent is associated with plant and machinery,
and a trademark or brand name is associated with goods. Thus, the situs of bitcoin can be
linked with the country where its operating server is located.

6. Why government is not approving cryptography as a legal tender ?

6.1 Pretending as a security dread.
Government of India has not approved cryptocurrency as a legal tender in the form of
currency because of dread in the security system of blockchain. Government says that it
is not authorised trustworthy source to rely upon the transactions of cryptocurrency for
the long run. But as according to my perspective there should be no doubt to the
government regarding the security of the blockchain system, because as discussed above
that the transactions regarding Bitcoin runs on the blockchain system and that blockchain
system is connected with thousands of computers where if any computer defaults
technically then rest of the thousand computer will identify that default and do the
correct.19 Therefore, it will not be possible for anyone to hack all the thousands of
computers at the same time. Hence, there should be no doubt regarding the security of the
blockchain system. And if then also government is having any doubt regarding the
security of blockchain system then there are technical experts in the govt. department that
they should take the expert advice from them also regarding the system of blockchain.

6.2 Government as a part of the black system.

Here "black system" is referred to the system of corruptions, frauds, money laundering
and other type of illegal activities regarding transfer of currencies. As it is well known
fact that government also involved in such type of activities impliedly but not expressly
and entirely. As the blockchain is considered to be the most secured way of transactions

19
Jamie Moy, Forget Bitcoin, It's All About The Blockchain, Forebs,
https://www.forbes.com/sites/jamiemoy/2018/02/22/forget-bitcoin-its-all-about-the-
blockchain/#1ba791cb5f6b
regarding anything therefore there will not be the possibilities of corruption and the
money laundering because if anyone does so then it will reflect on the blockchain system
globally on the internet, and then ultimately the people will get caught over the internet.
This is another reason that why the government is not approving cryptocurrency is a legal
tender as it is well known fact that most of the fund are injected into the governments
account by the way of these sources only.

7. Why India should opt cryptocurrency ?

7.1 To eliminate illegal activities
Opting Bitcoin by the way of blockchain system can be considered to be most secured
way of transactions, It eliminates all kinds of illegal activities, for example- Corruptions,
Money Laundring, Frauds, etc. If the physical currency will be eliminated and instead of
physical currencies virtual currencies will be opted in the transactions then definitely
gradually it will decrease the level of corruptions and all other kinds of illegal activities.

7.2 To make secure and trustworthy transactions

Transactions of Bitcoin by the way of blockchain system makes the transaction secured
and trustworthy because as it has been already discussed that blockchain is a system
which is operated by thousands of computers the probability of making the defaults in the
transactions is very low. Hence, it is considered to be the most secured and trust for the
transactions.

7.3 Convenient way of transactions

Bitcoin or the cryptocurrency transactions are considered to be the most convenient
transactions in the global world. As it is a virtual transfer hence the people will not be
required to approach to any institutions for making a transaction.

7.4 No physical transfer of currency

In the transactions of cryptocurrency or the Bitcoin, there is no physical transfer of
currency. Transactions related to the Bitcoin and cryptocurrency are the virtual transfers.
Peoples are not required to go any particular institutions for the transfer of currency,
transactions are done over the internet. Hence, due to virtual transactions it eliminate
physical paperwork.

7.5 To enhance Indian economy

Opting cryptocurrency as a currency will gradually increase the Indian economy. All the
transactions over blockchain remove various kinds of illegal activities, eliminates paper
workload, makes most secured and more trustworthy, more convenient way of
transactions, it can also boom up the initiative taken by the government called "digital
India campaign".

8. Can transaction of cryptocurrency be tax-free?

It is all upon the government weather to make the transactions of cryptocurrency tax free
or not. As from the government's perspective government see the taxes over the
cryptocurrency as the source of revenue. Therefore, from the perspective of government
it is very difficult to eliminate a good source of revenue.

9. How tax free transactions of cryptocurrency can affect Indian economy in long
run?
There are many countries who do not levy taxes over the transactions of cryptocurrencies
or the Bitcoin. Elimination of taxes over the transaction of cryptocurrency will gradually
increase the investment in that particular country. Increment in the investment will results
into the increment in the economy of the particular country.
Therefore the government of India should eliminate the tax over cryptocurrencies so the
Indian residents can invest over cryptocurrencies. If once India became the hub of
cryptocurrency then the government mein levy high taxes over the cryptocurrency to earn
good revenue.

10. Conclusion :
There are various scenarios for levying the tax over the transactions of cryptocurrency as
discussed above. In some of the scenarios loopholes are also explained in this paper. As
in the case of non resident of India the taxability of that person is in doubt. As in the case
of Bitcoin mining also the taxability is in a doubt because of its generated asset.
Location of the transactions regarding Bitcoin also creates the problem because of law of
land. Hence, to eliminate all these kinds of loopholes government of India should make
an expressed specific act instead of existing provisions for the transactions over
cryptocurrencies.
Government of India should understand that the taxability over the virtual transactions
are not as same as the taxability over the physical transactions.
Secondly, I would like to suggest that government should opt cryptocurrency as a legal
tender to enhance the Indian economy for the long run, as the reasons are been discussed
above.