Law Library Stacks

Back to Index of Taxation of Cryptocurrency Block Rewards

India’s “levy, administration, collection and recovery” of income tax is governed by the Income Tax Act, 1961. The Income Tax Department is a government agency headed by the Central Board of Direct Taxes and is part of the Ministry of Finance’s Department of Revenue, responsible for direct tax collection. Tax authorities do not appear to have issued any clear guidance on the taxation of cryptocurrencies and mining-related activities. Despite this lack of clarity on the legality and tax treatment of cryptocurrencies, it appears that cryptocurrencies are taxable.

No official tax guidance was found on activities such as mining, staking, airdrops, and forking. Some experts treat cryptocurrency acquired through mining as a self-acquired capital asset considered taxable as “capital gains” under Section 45 of the Income Tax Act. However, some tax experts have found that, in order to determine “the cost of acquisition” (COA) for self-generated assets, reference needs to be made to section 55 of the Act, which does not include cryptocurrencies within its ambit so the COA is not determinable and, therefore, no capital gains tax arises.

I. Introduction

India’s government stated in early 2018 that cryptocurrencies such as Bitcoin are not legal tender in India.[1] Although the government has not enacted a regulatory framework for cryptocurrencies,[2] a bill, which is titled “Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019,”[3] has been drafted by an interministerial government committee and is pending examination by all concerned departments and regulatory authorities before it is introduced in Parliament.[4] The bill seeks to “prohibit mining, holding, selling, trade, issuance, disposal or use of cryptocurrency in the country.”[5]

The Reserve Bank of India (RBI) has issued a number of notifications advising caution on the use of cryptocurrencies.[6] RBI has warned “users, holders and traders on the risk of these currencies and clarified that it has not given any licence or authorisation to any entity or company to operate such schemes or deals.”[7] 

On April 6, 2018, the RBI issued a notification prohibiting banks, lenders, and other regulated financial institutions from “dealing with virtual currencies,” which stipulated that “[i]n view of the associated risks, it has been decided that, with immediate effect, entities regulated by the Reserve Bank shall not deal in VCs or provide services for facilitating any person or entity in dealing with or settling VCs. Such services include maintaining accounts, registering, trading, settling, clearing, giving loans against virtual tokens, accepting them as collateral, opening accounts of exchanges dealing with them and transfer/receipt of money in accounts relating to purchase/sale of VCs.”[8] Moreover, the RBI stated that “[r]egulated entities which already provide such services shall exit the relationship within three months from the date of this circular.”[9] However, the Supreme Court of India overturned the RBI’s 2018 circular prohibiting banks from dealing with cryptocurrency exchanges.[10] The Court found that a blanket ban “was disproportionate and that virtual currencies had caused no visible damage to banks regulated by the RBI.”[11]

Back to Top

II. Tax Treatment

A. General Treatment

India’s “levy, administration, collection and recovery” of income tax is governed by the Income Tax Act, 1961.[12] The Income Tax Department is a government agency headed by the Central Board of Direct Taxes and is part of the Ministry of Finance’s Department of Revenue, responsible for direct tax collection. Tax authorities do not appear to have issued any clear guidance on the taxation of cryptocurrencies and mining-related activities. Despite this lack of clarity on the legality and tax treatment of cryptocurrencies, it appears that cryptocurrencies are taxable. According to a tax expert quoted in an industry publication, “[t]ax laws in India are applicable irrespective of the legal status of income,” and “[e]ven if a ban is introduced, taxes would continue to apply to crypto income and it would not stop” tax authorities from “chasing unaccounted or untaxed income earned from dealing in crypto assets.”[13] The Indian Ministry of Finance’s Office of the Deputy Director of Income Tax, an Investigation Division of the Income Tax Department, “has reportedly been sending letters to Indians asking a long list of questions regarding their dealings in cryptocurrencies,” and the expert observed that such notices are issued when tax authorities have “reason to believe that a person has concealed or is likely to conceal a particular income.”[14]

In regard to tax treatment, according to an article in an Indian online legal publication, “one must analyze the nature and the manner in which the crypto-currency is held by the assessee. If it is held as an investment, then the same may be considered as a capital asset chargeable to capital gains tax when sold. However, if the cryptocurrency is held as stock-in-trade in the regular course of business, then any income will be considered business income chargeable to tax under the head of profits and gains from business or profession. The period of holding for classification as long term or short term capital asset can be 12 months.”[15]

B.  Mining, Staking, Airdrops, and Forking

No official tax guidance was found on activities such as mining, staking, airdrops, and forking.

Some experts treat cryptocurrency acquired through mining as a self-acquired capital asset considered taxable as a “capital gain” under Section 45 of the Income Tax Act. According to one accounting firm in India, “[i]ncome earned by trading cryptocurrency is not considered as a normal income. It is, instead, treated as a capital gain. Typically, capital gains apply to profits earned from the sales of a moveable or immovable asset.”[16] Cryptocurrency assets created by mining are “self-generated capital assets. Subsequent sale of such bitcoins would, in the ordinary course, give rise to capital gains.”[17]

However, in order to determine “the cost of acquisition” (COA) for self-generated assets, reference needs to be made to section 55 of the Act, which does not include cryptocurrencies within its ambit, so the COA is not determinable and, therefore, no capital gains tax arises. According to an India-based chartered accountants firm:

However, one may note that the cost of acquisition of a bitcoin cannot be determined as it is a self-generated asset. Furthermore, it does not fall under the provisions of Section 55 of the Income-tax Act, 1961 which specifically defines the cost of acquisition of certain self-generated assets.

Therefore, the capital gains computation mechanism fails following the Supreme Court decision in the case of B.C.Srinivasa Shetty. Hence, no capital gains tax would arise on the mining of bitcoins.

This position would hold till such time the government thinks of coming up with an amendment to Section 55 of the Act. At this juncture, given that the Indian tax laws are silent on the taxability of bitcoins completely, we thought it right to comment on a probable contrary view by the income tax authorities. There is a possibility that the department may not consider bitcoins as capital assets at all. Hence, the provisions of capital gains would not apply at all. Accordingly, the income tax authorities may choose to tax the value of bitcoins received from mining under the head “Income from other sources[.][Emphasis in the original.][18]

According to one law journal article, “it is difficult to say that such gains would be exempt from tax for long” and “reference may be made to valuation officer under §55A of the Act to ascertain the fair market value at the time of creation of cryptocurrencies and that would constitute the COA of the capital asset.”[19]

In 2018, the Indian government considered imposing a goods and services tax (GST) on the trade of cryptocurrencies, which would include treating mining “as a supply of service since it generates cryptocurrency and involves rewards and transaction fees” and requiring that “[t]ax should be collected from the miner on transaction fees or reward, and if value of the reward exceeds Rs 20 lakh [about US$0.27], individual miners will have to register under GST.”[20] At the end of December 2020, the Central Economic Intelligence Bureau, which acts as a think tank arm of the Ministry of Finance, conducted a study and introduced a proposal to impose an 18% GST on bitcoin transactions.[21]

Back to Top

Prepared by Tariq Ahmad
Foreign Legal Specialist
January 2021


[1] P. Suchetana Ray, Govt Plans to Bring in Law to Regulate Cryptocurrency Trade, Forms Panel, Hindustan Times (Jan. 14, 2018), https://perma.cc/6HLK-G9LD.  

[2] Seema Jhingan et al., India: Legal Status of Virtual Currencies/Cryptocurrencies in India, Mondaq (Apr. 6, 2017), https://perma.cc/5H4T-Y3TT.

[3] Dep’t of Econ. Aff., Ministry of Fin., Report of the Committee to Propose Specific Actions to Be Taken in Relation to Virtual Currencies (Feb. 28, 2019), https://perma.cc/4HTG-L2X7.

[4] Press Release, Dep’t of Econ. Aff., Ministry of Fin., Press Release on Report of the Committee on Virtual Currencies (July 22, 2019), https://perma.cc/PM5F-E2L5.

[5] Draft Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019, PRS Legis. Res., https://perma.cc/4SGZ-YRW6.

[6] Press Release, Reserve Bank of India (RBI), RBI Cautions Users of Virtual Currencies Against Risks (Dec. 24, 2013), https://perma.cc/KFB8-JPZ7; Press Release, RBI, RBI Cautions Users of Virtual Currencies (Feb. 1, 2017), https://perma.cc/9VTJ-UEL2; Press Release, RBI, Reserve Bank Cautions Regarding Risk of Virtual Currencies Including Bitcoins (Dec. 5, 2017), https://perma.cc/B4TK-TL5U.

[7] Vivina Vishwanathan, Bitcoin Regulations in India, Livemint (Dec. 21, 2017), https://perma.cc/527R-43SG.

[8] Press Release, RBI, Prohibition on Dealing in Virtual Currencies (VCs) (Apr. 6, 2018), https://perma.cc/EFW3-HCXG.

[9] Id.

[10] Internet & Mobile Ass’n of India v. Reserve Bank of India, Writ Petition (Civil) No. 528 of 2018, https://perma.cc/FX6U-QFKN.

[11] Charles Kerrigan et al., Supreme Court of India Lifts Ban on Cryptocurrency Exchanges, CMS (Apr. 3, 2020), https://perma.cc/C4D3-7YRL.

[12] Income Tax Act, 1961, https://perma.cc/9A7M-NURR.

[13] Kevin Helms, Indian Tax Authority Sends Probing Questions to Crypto Owners—Experts Weigh In, Bitcoin News (Aug. 7, 2019), https://perma.cc/E4JH-L6HA.

[14] Id.  

[15] Samarth Chaudhari, Taxation as a Form of Regulating Cryptocurrencies in India, IndiaCorpLaw (May 27, 2019), https://perma.cc/4NS8-42JR

[16] Taxation on Crypto Currencies In 2020, CA Mitesh & Assocs., https://perma.cc/58ZG-ZH39.

[17] Id.

[18] Id.

[19] Hatim Hussain, Reinventing Regulation: The Curious Case of Taxation of Cryptocurrencies in India, 10 NUJS L. Rev. 3 (2017), https://perma.cc/CV6U-2EB6.

[20] Nikunj Ohri, India Mulls GST on Trading of Virtual Currencies, Bloomberg Quint (May 23, 2018), https://perma.cc/9YXZ-7EDV

[21] Centre May Impose 18% GST on Bitcoin Trading, Bus. Today (Dec. 29, 2020), https://perma.cc/W7YD-4S53; Pradeep Thakur, Govt Weighs Imposing 18% GST on Bitcoin Trade, Times of India (Dec. 29, 2020), https://perma.cc/6P3R-SJYR.

Back to Top

Last Updated: 02/05/2021