• Stella Joseph and Yash K Desai, Economic Laws Practice

Taxation of Virtual Currencies in India: an Insight



Since its creation in 2009, Virtual Currency (“VC”), has seen astronomical growth over the world. India has witnessed this growth as the bitcoin market is valued to be around a whopping Rs 400 billion and ranked among the top five countries of the world. However, the phenomenon of VC is particularly difficult to describe in familiar legalese, given the dynamic technology on which it operates. There lies the inherent struggle in taxation of VCs.

One way to understand VCs would be as a form of digital representation of value, which is not exactly a legal tender, but consists of (i) a medium of exchange; (ii) store of value; and (iii) a unit of account and is traded online. The characteristics of a VC are palpably different from a fiat currency, which is backed by the government to give such currency a value. Cryptocurrency is ultimately based on cryptography [“crypt” means “hidden” and the “graphy” means “writing”, and thus cryptography is a form of hidden writing which is undertaken with the help of codes and more specifically done under computer programming] and distributed ledger technology (DLT) which allows for transactions and data to be recorded and shared in a synchronised and decentralised way across network participants, thereby not requiring any central control or administrator.

There are different stages of the lifecycle of VCs, from creation to disposal. A new VC is created in several ways, including through “airdrops”, an “initial token offering”, “mining” and/or “forging”. VCs may be stored through digital “wallets”. VCs may be sold/ transferred/ exchanged typically through VC exchanges or used as means of payment for other goods and services. Each stage of the lifecycle may result in separate taxable events.

Legal status of VCs in India:

The Reserve Bank of India (“RBI”) vide its Circular dated 6th April, 2018 (“Circular”) imposed restrictions on the entities regulated by the RBI to deal with or provide services to any individual or business entities dealing with or settling VCs in India. However, the said Circular was quashed by the Hon’ble Supreme of Court of India in a three-bench ruling in Internet and Mobile Association of India vs Reserve Bank of India dated 4th March, 2020[1], primarily on the grounds of proportionality. Therefore, at present, there is no restriction in India in relation to trading and dealing in VCs.

Taxation of VCs – Global Scenario:

Globally, several countries have put in place concrete taxation framework for VCs. The Organisation for Economic Co-operation and Development (“OECD”) report on Taxing Virtual Currencies – An Overview of Tax Treatments and Emerging Tax Policy Issues[2] published on 12 October, 2020, studied tax positions adopted for VCs in 50 jurisdictions across the globe and observed that:

(a) The income tax treatment of VCs across countries often flows from the definition of VCs within a country, as this defines how they fit within existing tax laws on the taxation of income from different sources. Most commonly, VCs are considered to fall within an existing category of income and taxed in the usual way for that form of income.

(b) The VAT treatment of VCs is more consistent across countries than income taxes. In almost all countries, the exchange of VCs is not subject to VAT. This applies whether the exchange is made for fiat currency or other VCs. The pure activity of using VCs to acquire goods or services is also outside the scope of VAT, and thus no VAT is levied on the value of the VCs themselves.

Taxation of VCs in India – proposals floated till now:

Unlike several countries which have put in place a taxation framework specifically for VCs, India has still not issued a stabilized framework for taxation of VCs on account of absence of any clear tax policy or guidance on this issue.

However, as per certain recent media reports, the Central Economic Intelligence Bureau (“CEIB”), an arm of the finance ministry, has recommended to the Central Board of Indirect Taxes and Customs (“CBIC”) to impose 18% Indian Goods and Services Tax (“GST”) on VC transactions, with indication that the centre is likely to collect additional Rs. 7,200 crores annually on bitcoin trading. The key recommendation appears to be to put VCs under the category of ‘intangible assets’ and accordingly levy GST on all transactions. Some of the reported suggestions of the CEIB in this regard are as under:

  1. (i) Trading of VCs may attract 18% GST.

  2. Cryptocurrency ‘mining’ will be treated as a supply of service since it generates cryptocurrency and involves rewards and transaction fees. GST will be collected from the miner on transaction fees or reward. If the value of the reward exceeds Rs. 20 lakh, individual miners will need to register themselves under the GST.

  3. (The proposal also considers ‘wallets’ storing keys taxable. Wallet service providers should be registered under GST.

  4. Cryptocurrency exchanges need to register and pay tax on their earning.

  5. Buying and selling of cryptocurrencies will be considered under the category of supply of goods. Other related facilitating transactions will be counted under services, and these would include supply, transfer, storage, accounting, among others.

  6. The transaction value in rupees or the equivalent of any freely convertible foreign currency will be used to determine the value of cryptocurrency.

  7. In a scenario where both buyer and seller are in India, a transaction would be treated, as a supply of software and the buyer’s location will be the place of supply.

Analysis w.r.t. levy of GST on VCs:

It remains to be seen whether the above proposals can be implemented within the existing framework of the GST law. The foundational issue here would be to ascertain the true nature/characteristics of VC, which will help determine its correct classification for the purpose of taxation.

For a transaction to be liable to GST, such a transaction should qualify as either supply of “goods” or supply of “services” in terms of Section 7 of the Central Goods and Services Tax Act, 2017[3] (“CGST Act”). The definition of “goods” under 2(52) of the CGST Act, covers “every kind of movable property other than money and securities but includes actionable claim”.

Looking at the exceptions first, it may be said that VCs neither qualify as “money” nor as “securities”. The term money has been defined under Section 2(75) of the CGST Act to mean “Indian legal tender or any foreign currency recognised by RBI. At present, VCs are not recognised by the RBI and therefore the same will not qualify as money under GST law. Further, VCs may also not qualify as “securities” to mean derivative, shares, stocks or any other financial instrument as defined under the Securities Contracts (Regulation) Act, 1956. The term actionable claim is defined under Section 2(1) of the CGST Act to having the same meaning as assigned to it under Section 3 of the Transfer of Property Act, 1882. Actionable claim means a claim of debt, debt secured by mortgage or by hypothecation or pledge of movable property. In this regard, VCs may not even qualify as actionable claim.

Coming back to the main limb of the definition of goods, it may be possible to take a view that VC is a “movable property”. Further, even if one observes the definition of “service” under GST law, it means “anything other than goods” and thus if VCs are not covered under the definition of “goods”, then by default, it would get covered under the definition of “service”. As of now, in the absence of a clear prescription/ guideline by authorities, there continues to remain ambiguity as regards the correct classification of VCs, which keeps the connected aspects of rate, place of supply, exemption etc open for interpretation. The Hon’ble Supreme Court in Internet and Mobile Association of India(supra)[4] has aptly captured this conundrum while holding as follows “..various courts in different jurisdictions have identified virtual currencies to belong to different categories ranging from property to commodity to non-traditional currency to payment instrument to money to funds. While each of these descriptions is true, none of these constitute the whole truth. Every court which attempted to fix the identity of virtual currencies, merely acted as the 4 blind men in the Anekantavada philosophy of Jainism (theory of non-absolutism that encourages acceptance of relativism and pluralism) who attempt to describe an elephant, but end up describing only one physical feature of the elephant.”

Taxation of VCs in India – Income tax Implications:

In terms of Section 45 of the Income-tax Act, 1961[5] (“IT Act”), any profits or gains arising from transfer of capital asset would be chargeable to Income-tax under the head “capital gains”. It is contemplated by the Indian revenue authorities to levy capital gains on the profits and gains arising from VCs. However, for this purpose, it would be important to determine the nature of VCs i.e whether they qualify as “capital asset” in terms of Section 2(14) of the IT Act. Further, if dealing in VCs is in the nature of trading, the same may be levied to Income-tax as profits and gains of business or profession and accordingly be levied to Income-tax as per the slab rates. The view that gains from transfer of VCs will be subject to tax is also endorsed by the Hon’ble Minister of State for Finance, Mr. Anurag Singh Thakur clarifying on 28th March 2021 that “the gains resulting from the transfer of cryptocurrencies / assets are subject to tax under a head of income, depending upon the nature of holding of the same”.

Further, it is reported that Indian revenue authorities are contemplating to levy 2% equalisation levy on crypto assets that are being purchased by Indian entities or individuals from crypto exchanges in foreign nations. However, at present, there is no clarity provided by the revenue authorities on the modality of taxation of VCs. Further, in view of the recent statement of OECD where 131 countries including India have agreed to support the global framework which outlines a two-pillar solution and drop unilateral measures of digital service tax, it is likely that equalisation levy may be removed by 2023, post which taxation of VCs in India may continue to be governed by the IT Act alone.

Details of VC transactions to be reported under Financial Statements under Schedule III of Indian Companies Act, 2013:

The Ministry of Corporate Affairs (“MCA”) in India, in terms of Notification No. G.S.R. 207(E) dated 24th March, 2021 (applicable w.e.f. 1st April, 2021), under Part – II – Statement of Profit and Loss - General Instructions for Preparation of Statement of Profit and Loss, has mandated the reporting of details of VC or cryptocurrency transactions. Where a company has traded or invested in VCs during the financial year; (i) profit or loss on transactions involving VC shall be disclosed; (ii) the amount of currency held as at the reporting date; and (iii) deposits or advances from any person for the purpose of trading or investing in such currencies shall be disclosed. It is noteworthy that MOUs have been entered between the Central Board of Direct Taxes (CBDT), CBIC and MCA for sharing of information and thus such information could potentially be accessed with the Indian revenue authorities as well.

Recent Developments:

The central government intends to introduce the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021[6] (“Cryptocurrency Bill, 2021”). The discussion on the said Bill, earlier touted to be taken up in the upcoming monsoon session of FY 2021-22, is now reported to be further delayed. In terms of the Lok Sabha Bulletin – Part II, the objective of the Cryptocurrency Bill, 2021 would be to:

· create a facilitative framework for the official digital currency to be issued by the RBI, and

· prohibit all private cryptocurrencies available in India.

One will have to see if official digital currency which is mooted is akin to a Central Bank Digital Currency (“CBDC”) wherein, the value of such a CBDC would be linked and be equal to the fiat currency and may be free from the volatility that is generally associated with typical cryptocurrencies. In case of a CBDC that are specifically recognized by the RBI, one may see if these could qualify as “money” thus being classified outside the purview of GST, (being neither goods nor service).

One will also have to examine the extent and impact of the proposal to ban all private cryptocurrencies. At present, the definition of the term “private cryptocurrencies” lacks clarity. However, it is possible that certain exceptions may be allowed given the Hon’ble Finance Minister’s recent statement that “there will be a very calibrated position taken” as regards cryptocurrency. Even if some of private cryptocurrencies stand regulated/ prohibited, it is useful to note the settled position by the Hon’ble Supreme Court in CIT vs. Piara Singh[7] that once the taxability of the transaction is established in terms of the tax laws, even if there is an infraction of another area of law, such an infraction would not impact the taxability of the transaction per se. It would thus be interesting to see if tax authorities, while relying on the said proposition, still seek to tax such transactions.


At present, while several nations of the world are grappling with framing tax policies to levy tax on dealing with VCs, it would be important that the central banks along with the central governments of the respective nations attempt to give VCs a legal status. This may not necessarily be in the form of legal tender money, but to identify the elementary nature of VCs, which may be goods or services or commodities. Until the central banks provide a legal status to VCs, the taxation or executive wing of the government may not be able to effectively frame and draft concrete taxation provisions for levying taxes on VCs. Even globally, nations have typically first framed policies in consonance with their central banks to determine the classification of VCs and subsequently attempted to bring VCs in the taxation ambit.

Keeping this aspect in mind, it would important that the RBI along with the central government of India provides a legal status to VCs, without which the attempt of the taxation wing to levy GST or Income-tax on trading, investing etc of VCs may not fructify and lead to unsettling complications.


[1] Internet and Mobile Association of India v Reserve Bank of India (2020) SCC Online SC 275

[2] OECD, ‘Taxing Virtual Currencies: An Overview of Tax Treatments and Emerging Tax Policy Issues’ 12th October, 2020.

[3] The Central Goods and Services Tax Act, Act No. 12 of 2017.

[4] Supra (1)

[5] The Income-Tax Act, Act no. 43 of 1961.

[6] Cryptocurrency and Regulation of Official Digital Currency Bill, 2021

[7] CIT v Piara Singh (1980) SCC 166


Cite this Article - Stella Joseph and Yash K Desai, ‘Taxation of Virtual Currencies in India: an Insight’ (The Tax Terminal, 15th July 2021) <https://www.taxterminal.in/post/taxation-of-virtual-currencies-in-india-an-insight>

Taxation of Virtual Currencies in India - An Insight
Download PDF • 459KB

Disclaimer - The views presented in this Article represent solely the views of the Contributor and do not in any way reflect or represent the views of the Organization with which the Contributor is associated.