India Cracks Down on Bitcoin, Initial Coin Offerings
Last week, India’s federal tax body came down heavily on bitcoin traders in an attempt to address tax evasion. The country’s financial markets watchdog, the Securities and Exchange Board of India (SEBI), also issued a warning against initial coin offerings (ICOs), which are public fund raising activities for new cryptocurrency ventures.
Meanwhile, the federal banking regulator, the Reserve Bank of India (RBI) reissued a notification stating that any “user, holder, investor, trader” would be dealing with virtual currencies at their own risk.
This is yet another blow for the world’s cryptocurrency trade, which is experiencing a regulatory crackdown in China and Western markets. But it comes in a year which saw the value of bitcoin, one of several cryptocurrencies in the virtual world, rise by 1,300 percent.
Tax position on bitcoin in India
The income tax department began conducting surveys last week in Delhi, Mumbai, and Hyderabad – tracking down bitcoin dealers. Key information, such as their source of income and bank accounts, will enable the taxmen to ascertain their tax liability.
Moreover, cryptocurrency like bitcoin is not recognized as legal tender in India – as clarified recently by the country’s Finance Minister Arun Jaitely. They are also not tax exempt.
As such, the federal tax body has repeatedly clarified that capital gains tax will need to be paid on bitcoin earnings. This means that profits made on the sale of bitcoin and other such cryptocurrency will attract capital gains tax, depending on the duration of investment.
This is calculated as:
- Short-term capital gains tax of 30 percent levied on bitcoin held for less than three years; and,
- Long-term capital gains tax rate of 20 percent on bitcoin held for longer than 36 months.
Tax officials have warned that the penalty for not declaring bitcoin assets and earnings, and underreporting or misreporting such income is steep – the levy ranges from 50 to 200 percent during the tax assessment. A further levy of 12 percent interest on the income earned could be imposed.
The current tax raids on bitcoin dealers are conducted under Section 133A of the Income-tax Act, 1960.
Absence of regulation
In April, a committee set up by the Department of Economic Affairs under the Ministry of Finance examined existing international regulations on virtual currencies and suggested measures on consumer protection and the prevention of money laundering.
Following recommendations, the government recently announced plans to form another panel under the finance ministry to look specifically into bitcoin trading.
Any clarity on the regulation of virtual currencies will therefore have to wait. Till then, cryptocurrencies remain a murky area in India – subject to ad hoc investigations by SEBI, warnings by the RBI, and tax supervision without concrete legal safeguards in place.
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