This article is written by Nihaarika Sangwan. 


In early 2018, the Indian government declared that cryptocurrencies such as Bitcoin are not legal money in the country. Although the government has not enacted a regulatory framework for cryptocurrencies, an inter-ministerial government committee has drafted a bill titled “Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019,” which is awaiting examination by all concerned departments and regulatory authorities before being introduced in Parliament.

The Bill aims to “prohibit cryptocurrency mining, holding, selling, trading, issuing, disposal, or use in the country.” 

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The Reserve Bank of India (RBI) has issued a number of advisories urging people to use cryptocurrencies with prudence. The RBI has issued a warning to “users, holders, and traders about the risk of these currencies” and underlined that “no entity or firm has been given any licence or authorization to run such schemes or deals.” “In view of the related dangers, it has been decided that, with immediate effect, organizations regulated by the Reserve Bank shall not trade in VCs or provide services for helping any person or entity in dealing with virtual currencies,” according to the RBI notification. Such services include maintaining accounts, registering, trading, settling, clearing, lending against virtual tokens, taking them as collateral, opening accounts with exchanges that deal with them, and transferring/receiving money in accounts related to the purchase/sale of VCs. The RBI further specified that “regulated companies that already supply such services shall exit the partnership within three months of the date of this circular.”

On the other side, the Supreme Court of India overturned the Reserve Bank of India’s (RBI) 2018 circular prohibiting banks from dealing with cryptocurrency exchanges. The Court determined that a blanket prohibition was “disproportionate,” and that virtual currencies had caused no evident harm to the RBI-regulated institutes.

What is crypto-currency 

Cryptocurrency is a digital or virtual currency that is encrypted to prevent counterfeiting and double-spending. Blockchain technology, which is a distributed ledger enforced by a distributed network of computers, is at the heart of several crypto-currencies. Crypto-currencies are distinguished by the fact that they are not issued by any central authority, making them potentially impervious to government intervention or manipulation.

  • A cryptocurrency is a type of digital asset that is based on a network that spans a huge number of computers. They are able to exist outside of the control of governments and central authorities because of their decentralised structure.
  • The term “cryptocurrency” comes from the encryption techniques used to keep the network safe.
  • Many cryptocurrencies rely on blockchains, which are organisational mechanisms for ensuring the integrity of transactional data.
  • Blockchain and similar technology, according to many experts, will disrupt numerous industries, including finance and law.
  • Cryptocurrencies have been criticised for a number of reasons, including their use in illicit activities, exchange rate volatility, and the vulnerability of the infrastructure that helps to hold it up. On the other hand, their flexibility, divisibility, inflation resistance, and transparency have all been praised.


The currency’s origins may be traced all the way back to 1998, thanks to a computer programmer named Wei Dai. He first proposed the concept of cryptocurrency and called it B-Money which was anonymously distributed through an electronic decentralized cash system. This notion was carried forward and finally given substance in 2009 by Satoshi Nakamoto, the pseudonymous founder of Bitcoin, the most generally accepted and first decentralised Cryptocurrency.

According to Merriam-Webster, a digital currency is “any form of currency that only exists digitally, and is used to prevent counterfeiting and fraudulent transactions, as well as to govern the issuing of new units.  

The historic stance taken by the Indian Government 

In 2008, the term “crypto-currency” was coined for the first time. The first transaction took place in 2009 all over the world. Between 2012 and 2017, a slew of crypto-currency exchanges debuted in India, resulting in the birth of the Indian cryptocurrency market. Litecoin, Ripple, Dash, Monero, Ethereum, Zcash, and other prominent exchanges have all been built. The rising popularity of crypto-currency has caused the Reserve Bank of India to be concerned about a shift away from a traditional cult. Consider the RBI’s role as a statutory entity charged with establishing the Indian economy, as well as its powers and responsibilities, which include banking system management and monetary policy bodywork. Maintain price stability while controlling the pace of the economy’s expansion.

The Reserve Bank of India (RBI) recognised the shift in new technology in India in 2013 and released a press release cautioning the public against trading in virtual currencies, such as Bitcoin. However, after the demonetisation of high-value currency notes in November 2016, Bitcoin began to gain traction in India, resulting in a move away from traditional online banking services and the introduction of cryptocurrencies. The growing popularity and adoption of cryptocurrencies by various Indian consumers prompted the RBI to publish a press release in February 2017 reiterating its earlier concerns and clarifying that no business has been granted a licence to operate with Bitcoins. Siddharth Dalmia and Dwaipayan Bhowmickin filed two petitions in the Supreme Court in October and November 2017: one to ban the selling and purchase of cryptocurrencies in India, and the other to regulate cryptocurrency.

In addition, the Indian government established a high-level inter-ministerial group to regulate Bitcoins and virtual currencies. This committee published reports in July 2019 suggesting that private cryptocurrencies be banned in India; however, no such legal provision was enforced. The RBI issued a circular on April 6, 2018, forbidding banks from not just dealing with or settling virtual currencies, but also from providing any services to entities or organisations dealing with bitcoins or virtual currencies.

This cycle undermined cryptocurrency exchanges’ business operations, as they relied on banking services to convert cash to cryptocurrencies and vice versa. It had an impact not only on bitcoin exchanges, but also on conventional businesses, such as paying for office space, personnel salaries, server space, and so on.

The members of the Internet and Mobile Association of India (“IMAI”) filed a writ suit in the Supreme Court on the grounds that the RBI circular had dealt a severe blow to cryptocurrency activities, resulting in a significant reduction in transaction volumes.


Blockchain is one use of distributed ledger technology (DLT), which is primarily used to maintain a decentralised database (that is, ledger), with no central authority to authorise and keep a record of the database. The value of a cryptocurrency is determined by demand, supply, media projections, and coin mining activities. Unlike gold, which backs a reasonably stable fiat currency, they are thought to be very volatile, with value swinging dramatically in both directions overnight.

Taxation is a key stumbling block when it comes to regulating cryptocurrencies. Many governments agree that cryptocurrencies should be taxed, but disagree on whether they should be taxed as a currency or a commodity. Border taxes are another flaw that has to be addressed, as the ease with which tokens may be brought through border checkpoints without paying border taxes underlines the need for a stronger framework both inside and between countries.

It was the world’s first cryptocurrency and one of the first Blockchain apps that did not require users to trust a central authority. The business adopted this new technology because of its fundamental advantages, such as reliability and distributed consensus.

Cryptocurrency’s purpose

Cryptocurrencies were created to make it easier for two people to send money without the involvement of a trusted third party such as a bank or credit card company. Instead, these transfers are protected by the use of public and private keys, as well as various types of reward schemes like: Proof of Work and Proof of Stake. In modern cryptocurrency systems, a user’s “wallet,” or account address, has a public key, whereas the private key is only known by the owner and is used to sign transactions. Fund transfers are conducted with low transaction costs, allowing users to avoid the hefty fees charged by banks and financial institutions for wire transfers.

Crypto-currency transactions are ideal for a variety of illicit acts, including money laundering and tax evasion, due to their semi-anonymous character. Crypto-currency supporters, on the other hand, place a high emphasis on anonymity, citing benefits such as whistleblower protection and demonstrators living under harsh regimes as examples. Some cryptocurrencies have a higher level of privacy than others. Bitcoin, for example, is a comparatively poor option for conducting illicit business online because of forensic study of the Bitcoin blockchain, which has helped authorities to identify and convict perpetrators. There are, however, more privacy-oriented currencies like Dash, Monero, and ZCash, which are significantly more difficult to trace.

Judicial approach to bitcoin

The Supreme Court struck down a long-standing circular prohibiting cryptocurrency circulation in the country on the following grounds in the case of Internet and Mobile Association v. RBI, a 180-page lengthy judgment by Justice V Ramasubramanian:

  1. The Reserve Bank of India (RBI) cannot abuse its regulatory authority over virtual currencies.
  2. Any exchange that supports the use of cryptocurrency is prohibited, which is disproportionate;
  3. It is also ultra vires under Article 19(1)(g) of the Constitution, which says that the basic freedom to engage in any activity, trade, or business protects businesses engaged in legal trade.

The key issues of the decision are worth noting because the court and petitioners conducted considerable worldwide benchmarking in defining cryptocurrencies, their identity, the instrument they include, and who has the jurisdiction to regulate them. Many organisations throughout the world regard cryptocurrency as having money-like characteristics, despite the fact that none of them have recognised it as legal tender, therefore the RBI has the authority to regulate virtual currencies in this scenario. 

The RBI has spoken in the past about confronting its entities and corporations to avert harm to the banking sector and the economy, but there is no actual evidence to support this claim. It is critical to pay attention to the three points listed below:

  • The RBI has not detected any harm caused by the virtual currency function’s actions in the last five years or more; 
  •  Virtual currencies are prohibited;
  • Even the Inter-Ministerial Committee, which was established in 2017 and recommended a specific legislative framework as well as the establishment of a new law, the Crypto-taken Regulation Bill 2018, aimed to regulate rather than prohibit the measures.

The court stated that RBI did not establish alternative procedures to protect against the aforementioned dangers. The court stated to the president of the European Union Parliament that the European Central Bank and Parliament had looked into not abandoning the cryptocurrency business, but instead recommended strengthening the financial system and regulatory schemes and that the RBI had overlooked alternative measures in this case.

In the case Modern Dental College and Research Centre v. State of Madhya Pradesh, 2016, the court looked at the four-prong standards set by the petitioners to evaluate the proportionality of the action that the RBI measures should pass, as follows:

  • RBI measures should be designed for a specific purpose;
  • They should be rationally connected to the purpose; 
  • And there should be no less invasive alternatives.
  • There should be a connection between the importance of goals and the restriction of rights.

The court stated that the RBI’s use of terms such as “money laundering” or “black money” does not qualify as a reasonable purpose, and that other options should have been investigated. The most important takeaway from this decision is that the Supreme Court chastised policymakers, three committees, and two draught bills for failing to take a clear stance on cryptocurrencies.

This ruling solely covers the firms listed in Article 19(1)(g), not amateurs ( hobbyists, traders in VCs, and VC Exchanges).

Why was it banned in India at first

Several crypto-currency transactions were unregulated after the introduction of Bitcoin in India since there was no clear regulation barring or regulating their use. The Reserve Bank of India released a crypto-currency circular in April 2018 that did not prohibit the usage of crypto-currencies outright but did restrict the provision of banking services to anyone who dealt in them. As a result, adopting a transaction prohibition helped the usage of crypto-currencies; nevertheless, the Supreme Court judgment gave those dealing with these currencies a short reprieve.

Tax treatment 

General Treatment

The Income Tax Act of 1961 governs the “levy, administration, collection, and recovery” of income tax in India. The Income Tax Department is a government body that collects direct taxes and is led by the Central Board of Direct Taxes. It is part of the Ministry of Finance’s Department of Revenue. There does not appear to be any clear guidance on the taxation of cryptocurrencies and mining-related activity from tax authorities. Despite the lack of clarity on cryptocurrency legality and taxation, it appears that cryptocurrencies are taxable. According to a tax expert quoted in an industry publication, “Indian tax requirements apply regardless of the legal status of income.” Furthermore, the research states that “even if a prohibition is implemented, taxes on crypto income will continue to apply, and it will not prevent tax authorities from pursuing unaccounted or untaxed revenues earned from dealing in crypto virtues.”

 The Indian Ministry of Finance’s Office of the Deputy Director of Income Tax, which is part of the Income Tax Department’s Investigation Division, “has reportedly been sending letters to Indians asking a long list of questions regarding their dealings in cryptocurrencies,” according to the expert. Such notices are issued when tax authorities have reason to believe that a person has concealed or is likely to conceal a particular income.

According to an article in an Indian online legal newspaper, “one must investigate the nature and manner in which the crypto-currency is held by the assessee in terms of tax treatment.” If it’s kept as an investment, it could be regarded as a capital asset that’s subject to capital gains tax when sold. If, on the other hand, the cryptocurrency is kept as stock-in-trade in the usual course of business, any earnings will be regarded as business income and subject to tax under the heading of profits and gains from business or profession. A 12-month holding duration can be used to determine whether a capital asset is a long or short term.”

Mining, Staking, Airdrops, and Forking

Mining, staking, airdrops, and forking are all activities that have no explicit tax guidelines.

Some experts regard bitcoin mined as a self-acquired capital asset taxable as a “capital gain” under Section 45 of the Internal Revenue Code. “Income obtained through bitcoin trading is not regarded as a normal income,” according to one Indian accounting firm. Instead, it’s considered a capital gain. Profits made from the sale of a movable or immovable asset are typically referred to as capital gains. Mining-generated cryptocurrency assets are referred to as “self-generated capital assets.” In the ordinary course, subsequent sales of such bitcoins would result in financial gains.” However, in order to compute “the cost of acquisition” (COA) for self-generated assets, one must rely on section 55 of the Act, which does not apply to cryptocurrencies, therefore no COA can be computed and no capital gains tax is owed.

According to a chartered accounting firm based in India:

It should be emphasised, however, that because bitcoin is a self-created asset, it is impossible to quantify the cost of acquisition. Furthermore, Section 55 of the Income Tax Act of 1961, which determines the cost of acquisition of some self-generated assets, does not apply. As a result of the Supreme Court’s judgment in the case of B.C.Srinivasa Shetty, the capital gains computation process collapses. As a result, there would be no capital gains tax on bitcoin mining.

This posture will be maintained until the government considers amending Section 55 of the Act. Given that the Indian tax rules are absolutely quiet on the taxability of bitcoins at present time, we believed it would be appropriate to comment on a possible contrary perspective by the income tax authorities.

It’s possible that the department won’t even view bitcoins as capital assets. As a result, the capital gains provisions would not apply at all. As a result, the value of bitcoins received from mining may be taxed under the heading “Income from other sources” by the income tax authorities. The emphasis in the original is mine.

According to one law journal article, “it is difficult to say that such gains would be tax-free for long,” and “reference may be made to valuation officer under Section 55A of the Act to ascertain the fair market value of cryptocurrencies at the time of creation, and that would constitute the COA of the capital asset.”

The Indian government contemplated putting a GST on cryptocurrency commerce in 2018, which would include classifying mining “as a provision of service because it generates bitcoin and involves rewards and transaction fees.” And that “tax should be collected from the miner on transaction fees or rewards, and individual miners will have to register under GST if the prize value surpasses Rs 20 lakh [approximately US$0.27].”

The Central Economic Intelligence Bureau, which operates as a think tank arm of the Ministry of Finance, performed research and proposed an 18 percent GST on bitcoin transactions at the end of December 2020.

Bitcoins stored as a form of investment are exchanged for actual money

If bitcoins, which are capital assets, are held as an investment and then transferred in exchange for real cash, the increase in value will result in either a long or short-term capital gain, depending on how long the bitcoin has been held. Long-term profits would also be taxed at a 20 percent flat rate, but short-term profits would be taxed at the individual slab rate. After taking into account the benefit of indexation, the cost of acquisition for long-term capital gains will be estimated.

To better comprehend this, consider the following example:

Reiterating the income tax authorities’ likely opposing viewpoint described in Point 1 above, the IT authorities may not regard Bitcoins to be a capital asset, and so capital gains regulations would not apply. As a result, income tax authorities may elect to tax bitcoin gains under the heading “Income from other sources.”

Furthermore, if the income is taxed as “Income from other sources,” the individual will be required to pay taxes at the rate relevant to his tax bracket. For example, if his taxable income exceeds Rs 10 lakh, he will be taxed at a rate of 30%, rather than the flat rate of 20% he would face if he were taxed. If taxed under income from other sources, the benefit of indexation that would be available if taxed under capital gains would not be available.

Bitcoins held as stock-in-trade are exchanged for actual money

The gains derived from bitcoin trading activity would be liable to taxation at the individual slab rates because they are derived from a business.

Bitcoins are used as a form of payment for products and services

Bitcoins received in this manner will be regarded in the same way as money. In the hands of the recipient, it would be considered income. Furthermore, because the recipient’s income was earned through a company or profession, he would ordinarily be taxed under the heading earnings or gains from a business or profession. There is still a lack of clarity on the bitcoin disclosure required on income tax return forms.

“112 Distributed ledger system or blockchain technology permits the organization of any chain of data or transactions without the need for intermediaries,” our Finance Minister, Mr. Arun Jaitley, noted in the 2018 budget speech. The government does not consider cryptocurrencies to be legal cash or coins and will take all necessary steps to prevent them from being used to finance illegal activities or as part of the payment system. The government will investigate the use of blockchain technology in a proactive manner in order to usher in the digital economy.”

Furthermore, the Central Bank has opted to reaffirm its earlier warning to “users, holders, and traders of Virtual Currencies (“VCs”), including bitcoins, about the potential economic, financial, operational, legal, customer protection, and security risks involved with dealing with such VCs.” As a result, given that bitcoin transactions are rapidly increasing in India while laws regulating them are mostly lacking, we are confident that the government would issue a notification soon to clear up the ambiguity around bitcoin’s legality, taxability, and transparency requirements.


As a healthy democracy, we must assure reasonable and fair regulation in light of the forthcoming technological advancements in society; yet, the Supreme Court has ruled that crypto is not a fundamental part of the blockchain. The court mentions crypto as a “by-product” of such innovation in its decision; this is the crux of why India’s positions and cryptocurrency are out of step with the rest of the world due to a lack of investigation into the technical function of cryptocurrencies and how to keep network incentives in place.

It is crucial to note that the judgment only applies to businesses under Article 19(1)(g) and not to hobbyists (hobbyists, dealers in VCs, and VC Exchanges) as described in the current case, therefore people in this group are not protected. Given India’s economic growth, the future of cryptocurrencies is dependent on the RBI, as well as legislative action or legislation to ban or legalise cryptocurrencies.

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