II- Regulation and Taxation of Cryptocurrencies
As bitcoins and other crypto-currencies are meant to be a medium of exchange, the question is whether they may be treated as currency for tax purposes, or whether they are assets having value as investment.
Bitcoin – Is it ‘currency’?
‘Currency’ has not been defined in the tax laws. Guidance may be taken from the Foreign Exchange Management Act, 1999 (FEMA), which defines currency, as including 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 of India (RBI).
So far RBI has not recognised Bitcoin or any other cryptocurrency as a currency. Hence, it is not currency. They cannot be treated ‘foreign currency’ either.
Under FEMA, foreign currency means any currency other than Indian currency, and Indian currency has been defined to mean currency that is expressed or drawn in Indian rupees but does not include special bank notes and special one rupee notes issued under section 28A of the Reserve Bank of India Act, 1934.
Thus, Bitcoin or any other crypto-currency is neither an Indian currency nor foreign currency. Bitcoin is money-equivalent, but not money and the Supreme Court of India in the matter of Kasturi & Sons has held that the word money cannot be interpreted as “money’s worth”.
Bitcoin – Is it an ‘asset’?
Bitcoin as asset or property/ store of value: Capital asset has been defined in section 2(14) of the Income-tax Act, 1961 (Income-tax Act) to include property of any kind held by the assessee.
’Property’ is understood in a wide manner for tax purposes. The Kerala High Court, in the case of Syndicate Bank, while analysing the definition of capital asset, has thrown light on the concept of property as follows:
The terms ‘capital asset’ has an all-embracing connotation and includes every kind
of property as generally understood except those that are expressly excluded from the definition.
So too, the meaning of the expression, ‘property’. It includes every conceivable thing, right or interest or liability. In addition, for property, the emphasis is on holding and enjoying, and not on ownership – this is explained by Madras High Court in the case of Madathil Brothers, that the definition of “capital asset” under the Income-tax Act, referring to “property of any kind” carries no words of limitation. The definition
includes every possible interest that a person may hold and enjoy. The definition of “capital asset” refers to property of any kind “held” by an assessee, in contradistinction to the word “owner,” or “owned”.
Based on the above, Bitcoin is ‘property’, as the holder has exclusive right to spend/access the Bitcoin he holds. Once Bitcoin is considered property, the general tax principles applicable to property transactions apply to transactions using Bitcoin.
Below is a discussion of how existing general tax principles could apply to Bitcoin transactions.
Bitcoin/ cryptocurrency transactions in business
A Public Interest Petition (PIL) (Writ Petition (Civil) no. 406 of 2017), was filed under Article 32 of the Constitution of India in the Supreme Court, against Union of India, Ministry of Home Affairs, Ministry of Finance and Reserve Bank of India, against the use and business of illegal cryptocurrencies or Decentralised Digital Currency or “Virtual Currency” (VCs), such as, Bitcoins, litecoins, dogecoins etc. During the course of hearing on 14th July 2017, the Bench of Hon'ble Chief Justice of India J.S. Khehar and Hon’ble Mr. Justice D. Y. Chandrachud, while disposing off the PIL, gave four weeks to the
Reserve Bank of India to examine all security related issues about virtual currency, including Bitcoin, and respond to the Petitioners. The report is still awaited.
The discussion that follows assumes that there is no blanket ban on use of crypto-currencies, or other restrictions imposed on use of crypto-currencies by Indian taxpayers. Tax law does not currently bar acceptance of consideration in kind (which is what payments in cryptocurrency will in all likelihood be treated as).