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This article has been written by Sushil Joon from NUJS, Kolkata. The article has been edited by Khushi Sharma (Trainee Associate, Blog iPleaders) and Vanshika Kapoor (Senior Managing Editor, Blog iPleaders). 


After the imposition of lockdown, a number of people were laid off or their salaries were cut down. As the situation persisted and the demand in the economy sunk to an all-time low, people realized the importance of passive income. Therefore, people started businesses from their homes, delved into the stock market and explored real estate as well. However, people have become particularly interested in investing in cryptocurrency. Despite the fact that cryptocurrency is unregulated in India and its uncertain status, people have been increasingly interested to invest in cryptocurrency. As per reports, more than 15 million Indians have invested in cryptocurrency in 2021.

Despite cryptocurrency not yet being a legal tender and the government still deliberating on the status of cryptocurrency, the hesitation and dissatisfaction among people pertaining to cryptocurrency is steadily decreasing. People are contemplating cryptocurrency as some sort of future currency. However, even after witnessing such enormous growth in cryptocurrency investors, people are worried about taxation provisions on cryptocurrency in India. In the present Article, the author shall discuss the current legal status pertaining to taxation in India. The author further discusses the new cryptocurrency bill that is being deliberated on by the government and the taxation provisions that could follow owing to the nature of cryptocurrency.

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Cryptocurrency is a decentralized digital currency that was first introduced in 2009 by Satoshi Nakamoto. It is secured by cryptography, which makes it almost impossible to counterfeit or double spend.  Cryptocurrencies are decentralized networks based on blockchain technology – a distributed ledger enforced by disparate networks of computers. Thus, the word cryptocurrency is derived from the encryption techniques which are used to secure the networks.  As cryptocurrencies are not regulated by any central authority/ government, it renders the cryptocurrency immune from any governmental manipulation.

Cryptocurrency has allowed for secure payments over the internet and is denominated in terms of virtual tokens which are represented by ledger entries internal to the system. Thus, various encryption algorithms and cryptographic techniques are used to safeguard these entries such as elliptical curve encryption, public-private key pairs, and hashing functions.

The first cryptocurrency introduced was Bitcoin and which is also the most popular and most valuable. Over the years, other types of cryptocurrencies have also been introduced in the market such as Etherium, Litecoin, Carnado etc.

Current Legal Status of cryptocurrency in India

In 2018, RBI forbade banks from dealing in cryptocurrencies. However, in 2020, the Supreme Court reversed the ban imposed by RBI. Therefore, cryptocurrency, though unregulated, is not illegal in India. After the massive surge of cryptocurrency investments, although the government is still contemplating the legal status of cryptocurrency in India, there are still no laws in the country to regulate cryptocurrency transactions. Therefore, there are no fixed laws that are applicable to gains made on cryptocurrency investment. However, even though the government has a dubious stand over the issue and the government is still deliberating on bringing the cryptocurrency investors under a tax regime, the profits made through crypto investment have to be disclosed. 

The Ministry of Corporate Affairs has made it mandatory for the companies to disclose cryptocurrency trading/investments during a financial year. Moreover, the Central Board of Direct Taxes (CBDT) has already announced that people who made money out of bitcoin must declare and pay the relevant tax. 

Furthermore, the deliberation over cryptocurrency culminated when Finance Minister tabled a cryptocurrency regulation bill in Parliament. Although nothing is certain as of now, this is a positive step in the right direction. Although many authorities are in favour of abolishing the cryptocurrency altogether, there might be some kind of regulator and tax rate slabs.

Cryptocurrency Regulation Bill

The government of India has been deliberating to introduce a bill in order to regulate and tax cryptocurrency transactions in India i.e. “Cryptocurrency and Regulation of Official Currency Bill, 2021” (hereinafter referred to as the new bill). However, there has been no further development on that. According to reports and leading newspapers, considering the huge spike in the popularity of cryptocurrency investment, the government has dropped the idea of a blanket ban on trading and investment in cryptocurrency. Instead, the government is looking forward to harnessing the new possibilities of economic growth and taxation offered by digital currency and blockchain technology. The honourable Finance Minister Nirmala Sitharaman has also announced that the government is considering the prospects of using blockchain technology to usher in a new dawn of the digital economy.

Although the new bill has been in the news for some time now, the contents of the bill remain uncertain. However, it is expected that the government would give a definite meaning and definition as to what qualifies as cryptocurrency and thus will set a benchmark standard for the inclusion of cryptocurrency assets. Depending upon the definition of the cryptocurrency, the government might treat it as a capital asset or as an additional income and levy tax accordingly. 

Despite the huge surge in popularity of cryptocurrency as a digital currency, the RBI and government has taken a firm stand that would not accept cryptocurrency as legal tender and no payment or settlement as such can be done through cryptocurrency. However, the new bill might enable RBI to create a cryptocurrency equivalent to that of the country’s fiat currency i.e. Central bank Digital currency (CBDC). The RBI has been recently working on the CBDC project. Therefore, it is likely that cryptocurrency might be treated as an equivalent of fiat currency, subject to the bill passed by the parliament before the completion of the CBDC project.

Cryptocurrency might seem to be the future currency, but it is still in the nascent stages.  A lot of innovation is yet to take place in the realm of cryptocurrency and blockchain technology, which will leave a lot of grey areas in the new bill. However, such uncertainty might prove to be good for innovation and might also lead to changes in taxation policy over the years.

The introduction of the new bill will simplify the process of trading and holding cryptocurrency in a safer technological environment. Furthermore, the regulations accompanied by such a bill will also help in curbing illegal activities and the circulation of black money via cryptocurrency. It would also help to improve the functioning of corporate governance with increasingly transparent disclosures.

Cryptocurrency and Taxation

The government has specified that the gains made through cryptocurrency have to be disclosed. However, neither the Income-tax act, 1961 or the Central Board of Direct Taxes (CBDT) stipulates any specific tax treatment for income earned through investment in cryptocurrency. Therefore in the present section, the author will discuss how the cryptocurrency can be taxed under various heads of income.

The gains made from cryptocurrency can be broadly divided into 3 categories i.e. (i) Capital gains, (ii) income from business or profession, or (iii) income from other sources depending on how an individual holds the cryptocurrency and can be taxed accordingly:

Capital GainsThe IT Act does not include any provision for cryptocurrency. However, the definition of capital gains in the IT act is quite inclusive. According to Section 2(14) of the IT Act, “capital assets include property of any kind held by an assessee, whether or not connected with his business or profession.” Although the section contains certain exceptions, cryptocurrency does not fall among them. As cryptocurrency is a digital asset, it can be considered as a capital asset similar to shares.

The capital gain on an asset is calculated as the difference between the selling price and the cost of acquisition, sale consideration and expenses. As the cryptocurrency is stored in a digital wallet and is mutually exchangeable, it becomes increasingly difficult to determine the cost of acquisition on being purchased and sold. In such a case, the taxpayer should prefer to adopt the first- first-out method to determine the cost of acquisition.

The cryptocurrency bought and sold for the Indian rupee can be directly taxed, subject to indexation benefit. However, the problem arises when cryptocurrency is bartered with another. Such barter is an exchange and is liable to be taxed as capital gains. The taxpayer shall be necessitated to report such transactions and pay taxes on each disposal. However, what if cryptocurrency investors incurred losses owing to the volatile nature of currency? In such a case, the investor can set off such losses against gains from the sale of other assets.

Income from business or Profession: Cryptocurrency can also be utilized for business income. Similar to investment companies who speculate short-term price movements and hold and sell the shares/debentures/securities frequently and make gains on them, cryptocurrency can also be utilized to generate business income. Speculation of prices of cryptocurrency and holding to cryptocurrency as stock in trade and income made therein shall be considered as business income. Such income shall be taxed as business income and can be treated on par with investment companies.

Taxpaying authorities can further classify such income as speculative income based on certain considerations such as, whether cryptocurrency is used as a commodity and periodically or ultimately settled otherwise than by way of actual delivery or transfer of such commodity.

 Income from Other sources: Apart from trade in cryptocurrency, income can also be accrued by mining and receipt of cryptocurrency in the form of gifts. These transactions can be taxed under Income Tax Act.

  1. Mining: Since cryptocurrency can be considered a capital asset, mining cryptocurrency can be considered a self-generated asset. However, according to the current provisions of the IT Act, it is quite uncertain how the mined cryptocurrency can be taxed. As per Section 55, certain self-generated assets can be taxed. However, the cases not mentioned in Section 55 shall not be charged as per the rule laid down in the case of CIT v. BC Srinivasava Shetty. The court, in this case, held that when it is not possible to visualize the cost of acquisition, the gains thereon cannot be charged.

In the case of mining cryptocurrency, although no investment is required, it takes a lot of time and effort to mine cryptocurrency. Therefore, cost of acquisition cannot be ascertained. However, the government can introduce a new provision under the Cryptocurrency regulation bill or amend Section 55 to tax mined cryptocurrency.

  1. Gifts: Gifts are classified as income from other sources. Gifts received either in cash or in-kind are taxable if they are beyond the amount of Rs. 50,000. Therefore, cryptocurrency received as a gift worth 50,000 and above can be taxed as per the standard tax rate. 

Way Forward

Cryptocurrency has been gaining popularity all across the world and in response to that, many countries have formulated a taxation system for cryptocurrency gains. El Salvador even declared Bitcoin as its legal currency. However, India’s frigid response to the new digital currency ecosystem has made it increasingly harsh for cryptocurrency investors to file their returns. As the Indian’s government’s stand remains dubious pertaining to cryptocurrency transactions, many Indians have been shifting to foreign platforms for accessing digital tokens by buying and selling cryptocurrency as they provide better features and customer services. If the Indian government brings in requisite legislation and regulations through a new cryptocurrency regulation bill, it can pull back the business to domestic cryptocurrency exchanges.

The new regulation bill providing legitimization to the cryptocurrency can help to enhance India’s revenue and can also level the playing field for domestic cryptocurrency exchanges. India can also use blockchain technology to make transactions more transparent and usher in a new dawn of digital transactions. Furthermore, the legitimization of cryptocurrency will give investors more confidence to invest in the sector and this will further provide the government to tap the potential of untaxed cryptocurrency. It can prove to be a massive source of revenue for the Indian government which is currently burdened with a fiscal deficit. As remarked by Mr. Patel, “The government realizes the importance of employment opportunities in the several new start-ups that have sprawled up around the crypto ecosystem. The government should likely focus on creating a robust taxation framework that is easy to understand and simple to implement.”


Cryptocurrency has become a huge market for India since the inception of a pandemic. According to Chain analysis, Indians have parked approx. $6.6 billion in cryptocurrency in May this year as compared to a mere $293 million in April 2020. As cryptocurrency is still unregulated in India, it raises serious concerns for investors as well as the government. Therefore, it is high time to introduce regulatory and taxation laws for cryptocurrency. This will help to alleviate some burden from investors and at the same time the government by taxing the cryptocurrency can increase its revenue sources and take advantage of the blockchain technology at the same time. However, as the cryptocurrency is all about ‘no regulating authority, the government may still be unsure about the prospects of regulating it. What the government has to consider at this point is how not to undermine its own authority from the perspective of the regulator and simultaneously allow investors to join the space.

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