Research Paper On Cryptocurrencies in India


Cryptocurrency is a digital currency which is created and managed through use of cryptography as encryption technique. The cryptocurrency which has captured most of the attention is Bitcoin. Bitcoin was launched in the year 2009 by a group whose pseudo name was Satoshi Nakamoto. In recent times, Bitcoin has created a huge hype in the global as well as Indian financial markets. Till now, none of the cryptocurrency has been recognised as legal medium of payment, i.e. Currency.

Some Cryptocurrencies available in market – Bitcoin, Ethereum, Binance Coin, Tether and many more are available in market.

The RBI has neither declared the cryptocurrencies as illegal nor accepted those as legal tenders. In the inclusive definition of the expression “currency” under the Foreign Exchange Management Act (FEMA), a cryptocurrency has not been termed as such and the RBI has not recognised it as a legal tender. On the other hand, the Securities Exchange Board of India (SEBI) has not accepted it as an instrument, as it is issued by a ‘Server” and not by any person.

Notwithstanding above, various entities accept Bitcoins and similar cryptocurrencies as a mode of payment. It is recognised as a form of currency by them. In the absence of any regulatory framework in this regard, the trading and transactions are unaccountable and various issues relating to taxation thereof need specific consideration.

Where does bitcoin come from or how is it generated:

One can obtain bitcoins either by:

(1.) Mining:

Mining is an activity where an individual (called the “miner”) uses his computer process to crack computationally difficult puzzles. The process of cracking such puzzles which are integral to the blockchain technology, help in maintaining them. As a reward for this, the miner gets new bitcoins which is nothing but creation of a bitcoin or mining.

(2.) Purchasing them from a bitcoin exchange against real currency:

Everyone cannot be a bitcoin miner. Hence, you can consider buying bitcoins from bitcoin exchanges and store them in an online bitcoin wallet in digital form. Unicorn, Bitxoxo, Zebpay, Coinbase etc., are some of the bitcoin exchanges presently in India. Such bitcoins would be purchased in consideration for real currency.

(3.) The core innovation of cryptocurrency is a technology called the Blockchain:

The Blockchain, Satoshi Nakamoto’s innovation, is the heart and soul of Cryptocurrencies. It sets cryptocurrencies apart from other digital or virtual currencies. It secures the cryptocurrency by, among other things, making it impossible for someone to counterfeit bitcoin- no easy task. This innovation is arguably the main reason why bitcoin has succeeded where other virtual currencies have failed. Traditional currencies rely on producing notes that are certified and cracked by an official source, such as bank or treasury. They make it as difficult as possible to produce counterfeits and so people trust the value of the currency.

Blockchain is a Peer-to-peer network of computers & servers which are together taking certain decisions without having any single or multiple trusted computers to take a decision. In other words, there is no one to decide if the certain thing is right or wrong, everyone in the network decides this together using something called consensus algorithms. Reaching to a consensus without having any boss, leader or superior together is the core component of the Blockchain. And that’s why it is being considered as something which can lead the future innovations.

Any attempt to create digital currency is immediately faced with a problem. Any digital file can easily be replicated. If any-one can replicate the file representing digital currency, then it becomes easily counterfeited, and then it is worthless. But this isn’t only a problem for digital currencies- record labels, book publishers, film studios and even fashion labels of the 21st century are all facing similar issues.

The Blockchain changed everything. In the simplest terms, the Blockchain is just a ledger that lists all the units of the cryptocurrency and who owns them. As money changes hands, the ledger is rewritten to reflect the transaction. This way it does not matter where the money is physically located as long as there is a single unit of all the units in existence, and who owns how much. If you tried to replicate digital coins you would soon be found out when you went to spend them, as they wouldn’t be accounted for in the Blockchain.

The Blockchain means that bitcoin never actually need to exist. No one actually “send” the coin anywhere. They just update the Blockchain to reflect who owns what. The currency is basically one giant list of IOUs (tokens issued on a blockchain). Any attempts to tamper with the currency can be easily detected by checking the Blockchain. It is an indigenously elegant solution to a problem that many people thought would never be solved.

Reasons for Popularity of Cryptocurrency

  • Cryptocurrency removes the central banks from managing the money supply as bank reduce the value of money via
  • More secured than traditional payment systems using Blockchain
  • Cryptocurrency is showing the significant growth over the years which attracts investors

Is Cryptocurrency a good investment

As we know various cryptocurrencies are showing significant growth over the years such as Bitcoin, Ethereum. But many investors think cryptocurrency as speculation but not a real investment as it generates no cashflow like other currencies. Some of investors who see cryptocurrency as currency of future should note that currency needs stability so that merchants and consumers can determine fair price for goods.

Regulation Policy of Cryptocurrency in world:

United States of America

As there are large number of investors and blockchain firms in USA. There is no such regulatory framework for the asset class. The Securities and Exchange Commission (SEC) typically views cryptocurrency as a security, while the Commodity Futures Trading Commission (CFTC) calls Bitcoin a commodity, and the Treasury calls it a currency. Crypto exchanges in USA fall under Bank Secrecy Act (BSA) and must register with Financial Crimes Enforcement Network (FinCEN). They are also required to comply with anti-money laundering (AML) and combating the financing of terrorism (CFT) obligations. The Internal Revenue Service (IRS) classifies cryptocurrencies as property for federal income tax purposes.


Canada has a proactive stance towards cryptocurrencies. It became first country to approve Bitcoin exchange trading fund (ETF) in February 2021.Additionally, the Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organization of Canada (IIROC) have clarified that crypto trading platforms and dealers in the country must register with provincial regulators. Furthermore, Canada classifies crypto investment firms as money service businesses (MSBs) and requires that they register with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). From taxation point Canada treats cryptocurrency similar to other commodities.

United Kingdom

United Kingdom considers cryptocurrency as property but not legal tender. Cryptocurrency exchanges must register with the UK Financial Conduct Authority (FCA) and are banned from offering crypto derivatives trading. Regulatory body has introduced cryptocurrency specific requirements relating to KYC as well as with anti-money laundering (AML) and combating the financing of terrorism (CFT) obligations. Investors still has to pay capital gains tax on crypto trading profits more broadly, taxability depends on the crypto activities undertaken and who engages in the transaction.


Japan considers cryptocurrency as a legal property under the payment services act (PSA). Crypto exchanges in country must register with Financial Services Agency (FSA) and comply with AML and CFT obligations. Japan treats trading gains generated from cryptocurrency as “miscellaneous income” and taxes investors accordingly.


Australia classifies cryptocurrency as a legal property which makes them subject to capital gains tax. Exchanges are free to operate in the country, provided that they register with the Australian Transaction Reports and Analysis Centre (AUSTRAC) and meet specific AML/CTF obligations. In 2019, the Australian Securities and Investments Commission (ASIC) introduced regulatory requirements for initial coin offerings (ICOs) and banned exchanges offering privacy coins.


Crypto currencies in India have always held the ‘grey area’ status, there being no regulation or law so far. Even after investments being made at the speed of light, there seems to be no authoritative clarity on the same. The Government of India had invited suggestions on 22nd May, 2017 upto 30th July, 2017, whether to regulate, ban or self-regulate the crypto currencies.

Current Cryptocurrency Regime in India:

Currently, there is no legislation that governs, regulates or prohibits any kind of dealing in cryptocurrencies in India. Therefore, it is completely legal to sell, purchase, deal or mine the cryptocurrencies or set up any cryptocurrency exchange in India as on today (Jan’2022). However, from time to time the RBI had issued various circulars, advisories, press release etc. in relation to cryptocurrencies. The first such press release was issued on December 24, 2013 (“2013 Press Release”) whereby the RBI had warned the users, holders and traders of virtual currencies about their exposure to potential financial, legal, security, operation and consumer protection related risks. The 2013 Press Release also stated that no regulatory approvals, registrations or authorizations have been taken by any entity for dealing in virtual currencies. The RBI further issued a press release on February 01, 2017 (“2017 Press Release”) reiterating that it had not given any authorization to any entity to deal in virtual currencies and those who are engaged in such activities are doing it at their own risk. Concerning the increase in valuation of virtual currencies and the massive growth of Initial Coin Offering, the RBI recalled its warning issued in 2013 & 2017 Press Release via press release dated December 05, 2017.

Despite issuing various press releases, the crypto market in India was rapidly growing. This led to RBI issuing the RBI Circular thereby prohibiting all its regulated entities to deal in any kind of virtual currency or provide any service related to it. The entities who were engaged in such services were asked to exit within 03 months of the RBI Circular. The RBI Circular indirectly impacted all crypto traders and the private crypto exchanges as they faced a lot of difficulty in doing crypto business in India. The RBI Circular also made it difficult for the crypto traders to convert the virtual currency into fiat currency. All these hitches led to the filing of a petition before the Supreme Court thereby urging to strike down the RBI Circular. As the proceedings were going on in the Supreme Court, the high- level Inter Ministerial Committee (“IMC”) as constituted by the Department of Economic Affairs released a bill (Old Bill’2019, discussed below) to which it proposed to ban cryptocurrencies in India. This old bill’2019 has now been given a back seat while there is a new bill which is proposed (New Bill’2021), both of them have been discussed below:

Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019 (“Old Bill’ 2019”):

On November 02, 2017, the IMC was constituted to study the issues related to virtual currencies and actions to be taken in relation to same. On February 28, 2019, IMC submitted its detail report to the government along with the Proposed Bill. The Proposed Bill comprises of 27 sections which are demarcated under 8 chapters and 6 parts. Besides this, the Old Bill also contains a total of 3 schedules. The Old Bill defined ‘cryptocurrency’ as any information, code, number, or token, not being part of official digital currency, which is generated through cryptographic means. The said information, code, number, or token should provide a digital representation of value which can be exchanged with or without consideration and accepted in any business activity as a store of value or unit of account.

The Old Bill intended to put a blanket ban on dealing, handling, providing cryptocurrency related services or directly or indirectly using cryptocurrencies in India. Section 3 of the Old Bill stated that no person shall mine, generate, hold, sell, deal in, issue, transfer, dispose of, or use cryptocurrency in India except for the purpose of experiment or research. The Old Bill also recommended introducing a government backed cryptocurrency i.e., ‘Digital Rupee’ as a legal tender. Further, the Old Bill envisaged that the RBI may recognize any official foreign digital currency as foreign currency in India. The maximum punishment which was envisaged under the Old Bill was up to 10 years of imprisonment or fine up to INR 50 crores.

The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 (“New Bill’ 2021”):

The New Bill’2021 has been introduced with an aim to create a facilitative framework for creation of the official digital currency to be issued by the Reserve Bank of India. The Bill also seeks to prohibit all private cryptocurrencies in India; however, it allows for certain exceptions to promote the underlying technology of cryptocurrency and its uses.

The purpose of creating a digital currency is to provide significant benefits, such as reduced dependency on cash, higher seigniorage due to lower transaction costs and reduced settlement risk. The new digital currency would also possibly lead to a more robust, efficient, trusted, regulated and legal tender-based payments option. The intention of the government has shifted earlier from outright banning to regulating the same. It may be very well inferred that the crypto industry is awaiting a positive regulation that may permit investing and trading in crypto with certain restrictions. However, the Indian government listed this new bill to be tabled in the winter session of the Parliament, but no movement has not taken place as of now.

The Indian government may consider changes in the domestic tax laws of India to bring gains made from transactions in cryptocurrencies under the tax net in the coming Union Budget next month (Feb’22) along with the possibility of looking at imposing goods and services tax (GST) on the trade in virtual currencies. The likely aspects related to taxation are as follows:

Cryptocurrency Taxable under GST or Not:

we understand that the Crypto currency is digital asset maintained in computer-based ledger which secures transaction, control the creation of additional coins and also verify the transfer of coin ownership. It is pertinent to mention that such currency is not maintained by Central Government or Authorised group.

Further, Cryptocurrency has existed in the market for more than two decades now. However, people at large do not have a clear picture of what cryptocurrency is. In such circumstance, the dilemma is whether the said currency is taxable to Goods and Services Tax (hereinafter referred as GST) under Indian bylaws.

The GST is leviable on all supplies of goods or services or both, except on the supply of alcoholic liquor for human consumption, petroleum products, aviation turbine fuel, natural gas, electricity etc. While the term goods and services are defined as under:

  • Goods means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of
  • Services means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is

Is Crypto Currency Money?

Further, the term money has also been discussed in GST Law as:

Money means the Indian legal tender or any foreign currency, cheque, promissory note, bill of exchange, letter of credit, draft, pay order, traveller cheque, money order, postal or electronic remittance or any other instrument recognised by the Reserve Bank of India when used as a consideration to settle an obligation or exchange with Indian legal tender of another denomination but shall not include any currency that is held for its numismatic value.

In view of above interpretation, it can be said that since crypto currency is a decentralised currency the same is not recognised by Reserve Bank of India, it may not be treated as money and should be covered under definition of goods or services.

Consequently, the said transaction is leviable to GST. The subsequent question is whether the same should be classifiable as goods or services. We understand, cryptocurrency is an intangible asset. Although, till date there is no clarity on GST on cryptocurrency by Government whether same is classifiable as goods or services. Thus, an analysis is made based on similar intangible assets.

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

Buying and selling of crypto currencies 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.

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

In 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. For transfer and sale, the location of the registered person will be the place of supply. However, in a scenario where sale has to be made to non-registered persons, the location of the supplier would be considered as the place of supply.

Integrated GST would be applicable for transactions conducted beyond the Indian territory and would be considered as import or export of goods. IGST will be levied on cross-border supplies. Also, the commission on the fees charged by the crypto currency exchanges is likely to be taxed at 18% in the absence of any express clarification from the Government of India.

Direct Tax (Domestic tax law of India) implications in India:

In case of transactions between non-resident persons income arising from transfer of a cryptocurrency, whether of a capital nature or a revenue nature, is not taxable in India, even if the operating Server is located in India. But when a non-resident person enters a transaction with a person resident in India, such transactions would be taxable, and the Indian counterpart would have to comply with the requirements of “Deduction of tax at source” under section 195 of the Act.

Taxable as Business income:

If a person frequently deals in cryptocurrency as stock-in-trade, the gains therefrom would be taxable as profits and gains of his business. If he imports and/or exports goods, the fluctuations in the prices of cryptocurrencies would form part of the considerations paid and/or received for import or export of the goods, as the case may be.

Taxable as Capital income:

It is not known whether the liabilities for acquisition of any asset are incurred in cryptocurrencies and/or any borrowings are made payable in cryptocurrencies. If so, the transactions would attract the provisions of Section 43A of the Income-tax Act, 1961 (hereinafter referred to as “the Act”).

The definition of “capital asset” given in section 2(14) of the Act is wide enough to include ‘property’ of any kind held by an assessee, whether or not connected with his business or profession. Although the word “property” has not been defined, yet it signifies every possible interest which a person can acquire, hold or enjoy. Therefore, a cryptocurrency, being an intangible asset, can be deemed as a ‘capital asset’ and is liable to be taxed as such, depending upon the intention of the person to hold it as an investment or otherwise. On the basis of the prescribed period of holding, the gain would be determined as short-term or long-term. If a cryptocurrency is held for a period exceeding 36 months from the date of purchase, it will be considered as long-term capital gain and taxed @ 20% with the benefit of indexation. If it is held for a period of less than 36 months from the date of purchase, it will be considered as short-term capital gain and taxed as per the slab rates applicable to the taxpayer.

One of the methods for acquiring Bitcoins and/or cryptocurrencies is ‘mining’. A cryptocurrency acquired by this process amounts to a “self-generated asset”, which has no cost of acquisition. While as the trading in such an self-generated asset would be taxable as business income, no capital gains tax can be levied on transfer of such an asset in view of the judgment of the Hon’ble Supreme Court in the case of B.C. Srinivasa Setty [1981] 5 Taxman 1 (SC)] wherein it was held that if cost of acquisition of an asset cannot be ascertained, the machinery provision for computation of capital gains will fail, therefore, no capital gains can be levied on transfer of such assets. Thus, cryptocurrencies generated in the ‘mining’ process may be exempted from tax.

Import/Export transactions in crypto currencies:

Transactions in FEMA are categorized as ‘Current account transactions’ and ‘Capital account transactions’. First, we have to analyse current account transactions defined under FEMA (Section 2(j)). A “current account transaction” means “a transaction other than a capital account transaction and without prejudice to the generality of the foregoing such transactions include:

(1.) Payments due in connection with foreign trade, other current business, services, and shortterm banking and credit facilities in the ordinary course of business,

(2.) Payments due as interest on loans and as net income from investments,

(3.) Remittances for living expenses of parents, spouse and children residing abroad, and

(4.) Expenses in connection with foreign travel, education and medical care of parents, spouse and children;” A capital account transaction, as defined under Section 2(e), means “a transaction which alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India or assets or liabilities in India of persons resident outside India, and includes transactions referred to in subsection (3) of section 6.

In case a crypto currency is classified as ‘goods’, any import/export shall be classified as current account transaction. In case it is treated as an asset or property, the transaction shall be classified as capital account transaction and, accordingly, the implications will arise. In case, the transaction(s) is classified as capital account transaction, the same shall not be allowed, unless there is an explicit nod from the RBI.

Peer to Peer Cryptocurrency Exchange:

Peer to Peer exchanges are governed and handled by a software. These exchanges allow the participants to directly participate in exchanges without involvement of any trusted third party to practice all trades. Regular cryptocurrency exchanges are companies which serve as a medium between their customers and avail a profit by collecting fees. Contrarily, the communication between counterparties on peer-to-peer exchanges are regulated solely by pre-programmed software, with no demand of human intervention. This kind of approach has both a number of advantages as well as downsides. Peer to peer network actually prevents double spending. It has no central authority and is completely decentralised. Overall, P2P cryptocurrency exchanges are clear examples of decentralization philosophy.

How to report cryptocurrency gains, losses in income-tax return (ITR):

Reporting of cryptocurrency transactions

A taxpayer would have to report transactions related to cryptocurrency as business income if held as stock in trade, or capital gains if held as investments. If reported as business income, then ITR-3 form will be applicable to an individual in FY 2020-21, whereas if it is reported as capital gains from investment, then the individual would have to use ITR-2.

How to report in ITR-2/ITR-3

If cryptos are treated as investment, then long-term capital gains on sale of cryptos would need to be reported under CG schedule of ITR -2/ ITR-3 (if there are sources of business income), it will be reported under the head “From sale of assets where B1 to B8/B9 above are not applicable” for FY 2020-21.

Short-term capital gains on sale of cryptos would need to be reported in CG schedule of ITR-2/ITR-3 for FY2020-21, under “STCG on assets other than at A1 or A2 or A3 or A4 or A5 above”. Further, the return of income needs to be filed before the due date to claim carry-forward of capital losses, if any, for set-off in subsequent 8 years against earnings from capital gains.

On the other hand, if treated as business income, then sale of cryptos needs to be reported in Part A – Trading account under “Sale of goods” in ITR-3. The net profit/loss from sale of cryptos after reducing the permissible expenses, needs to be reported under the head, “Net profit before taxes”.

For loss incurred in cryptocurrency transactions, the return of income needs to be filed within the due date (July 31 of the year following the tax year, for an individual without any audit requirement. For loss incurred in cryptocurrency transactions, the return of income needs to be filed within the due date (July 31 of the year following the tax year, for an individual without any audit requirement, and October 31 following the tax year, if the individual is subject to a tax audit). For FY 2020-21, the aforesaid extended due dates are December 31, 2021 and February 15, 2022, respectively. If the loss is not a speculative loss, then such loss could be carried forward for 8 Assessment Years.

Reporting of cryptocurrency holdings in ITR

If an individual qualifies as resident and ordinarily resident, there is a requirement to report foreign assets under schedule FA, “Details of Foreign Assets and Income from any source outside India” irrespective of income in the tax return.

However, do keep in mind that there are no clear guidelines from the tax authorities on whether cryptos are to be considered as a foreign asset. As cryptos are digital assets, the location where the server is located and the law of the land under which protection is sought could be treated as the location where these assets are located. If it is determined that cryptos are located outside India, then they need to be reported in schedule FA of the ITR.

Additional reporting requirement in ITR

Further, if the net taxable income of the individual exceeds Rs 50 lakh, Schedule AL of the ITR Form is also required to be filled. This schedule requires an individual to report his immovable assets, jewelry, bullion, etc., archaeological collections, drawings, painting, sculpture or any work of art, vehicles, yachts, boats and aircrafts, financial assets like bank balances, including deposits, shares and securities, insurance policies, loans and advances given, and cash in hand. Further, any liability in relation to such assets are also to be reported such as home loan taken for buying a house etc. Currently, there is no guidance on requirement to report cryptos in schedule AL of the currently notified ITR forms.

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