top of page


[Harshit Joshi is a Fourth-year Law student from Vivekananda Institute of Professional Studies]

Cryptocurrency in India has been an unregulated area with a lot of uncertainty. The legality and taxability of cryptocurrencies are a few issues that remain under contention. Countries have repeatedly attempted to implement measures either to regulate Cryptocurrency or to ban them altogether. The Indian Government is currently in the process of releasing a draft bill for the regulation of virtual currency across the country. Therefore, this article attempts to analyze India’s stance on Cryptocurrency and suggests a possible tax regime for the regulation of such virtual currency.


Cryptocurrency has been designed to be a medium of exchange existing only in a digital format, that is decentralized and has no issuing authority where ownership records are stored in a ledger. This authenticates them as they rely on cryptography to prevent counterfeiting and fraudulent transactions. The formation of cryptocurrency credits to the idea that the government and corporations wielded excessive power over the lives of civilians.

The sudden rise of cryptocurrency and the lack of a concrete regulatory framework for the decentralised currency has provided delinquents with opportunities to use cryptocurrency for unlawful and illegal activities in unregulated cyberspace.


It is pertinent to understand the mechanism of transaction of crypto-currency for understanding the challenges in taxing them. Crypto-currency works on the following model:

1. It works on the premise of a profoundly progressed platform called blockchain. Block chain is a combination of various blocks of data wherein each block contains a series of transactions between various bitcoin addresses.

2. The block chain is recorded on a decentralized online platform. In absence of a

central third party responsible for verifying the transaction, there is a need for

verification and authentication of the transaction. Also, it is necessary to ensure

that the block chain cannot be hacked into or tampered by anyone. This is done by a group of programmers called miners.

3. Miners convert the data of the block chain and convert it into a random series and

numbers called hash, by using some specific algorithms. Every hash is unique

and a solitary change in the ‘hash’ completely changes the block chain. The change

in hash address is reported by the miners and if it is found to be correct on the

verification by other miners, the miner is awarded with bitcoins.

Thus, it is impossible to corrupt the system and the records of the blockchain as its network is distributed across multiple computers known as nodes and there is no single point of failure. It is only possible with the next generation of quantum computing which currently doesn’t exist.


The Reserve Bank of India (RBI) through its circular dated 6th April 2018 prohibited the use of Virtual currencies (VCs). According to the circular, the 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 of such VCs. The Supreme Court in the case of Internet and Mobile Association of India v. Reserve Bank of India struck down the 2018 RBI circular banning all the regulated entities from using cryptocurrencies as being violative of Article 19 of the Constitution. The Supreme Court in reaching their decision applied the principle of proportionality and held that even though the RBI is empowered to regulate the financial sector, the act of banning the use of cryptocurrencies as per the 2018 circular is not proportional to the alleged ‘mischief’ or harm caused to the RBI regulated entities that it aimed to address.


Tax can be levied when an income is generated, which is monitored under the Income Tax Act, 1961 (IT Act). Along with this, tax is also levied when there is expenditure in the form of purchase and barter which is monitored by the Central Goods and Services Tax Act, 2017 (CGST Act). In case of taxation of Cryptocurrencies, there are 3 categories of transactions in the use of cryptocurrency that can be taxed which are taxation of investors, taxation of miners and taxation of crypto currency exchanges and businesses which accept crypto currency as payment.

1- Taxation of investors

Transactions by persons who have purchased cryptocurrency as some sort of investment shall be seen as securities transaction and as per Section 2(14) and Section 45 of the IT Act, shall be chargeable to income tax under the head of Capital Gains. The Supreme Court of the United States in the case of SEC v. W.J. Howey & Co., laid out the Howey test in this regard. Hence, Cryptocurrency transaction to be construed as a securities transaction needs to fulfil the conditions laid down in the Howey Test.

The first component of the Howey Test is that there should be an investment of money. The nature of these transactions is such that an investor purchases cryptocurrency in exchange for fiat currency with the goal of investing the money in cryptocurrency. As a result, the first component of the Howey Test is satisfied. The second component of this test is that this investment shall be in a common enterprise. The test of common enterprise as applicable to the case of crypto-currencies is that there should be a joint participation of the investors in sharing of profits.

Given the nature of these transactions and there being millions of wallets to trade these virtual currencies, it can be safely said that there is always a market for crypto-currencies such that each investor has a fair chance to take a part of the profits. These transactions are in form of an investment and therefore it is safe to assume that there is a legitimate expectation of profits and hence the third component is also satisfied. The fourth component of the Howey test, that the profits are due to the efforts of others is also satisfied as the fluctuation in the price of Cryptocurrencies is due to market forces. Cryptocurrency fulfils the 4-element test and is therefore considered a security.

The cryptocurrency transaction can be categorized according to Section 77b(a)(1) of Securities Act, 1933 as investment contracts. Hence, these transactions should be interpreted as securities and considered capital assets, and income derived from these shall be chargeable to income tax under the head of capital gains. Two kinds of capital gains can be classified depending on the duration for which the capital asset was held before being transferred. If the capital asset was held by the person for less than 24 months, it will be listed as short-term capital asset and 15% tax is liable to be levied. If the capital asset was held for more than 24 months, it will be a long-term asset and a tax of 20% of total value of consideration shall be levied.

2- Taxation of Miners

Miners maintain ledgers and blockchain and solve complex mathematical problems to mine cryptocurrency. In USA, the IRS taxes crypto-currency generated through mining as self-employed income. Miner receives dual rewards for their work i.e., bitcoin from mining and fees received for services. For the purposes of the IT Act, they will be taxed under the head of “profits and gains from business and profession” because it fulfils the conditions. The services of mining and maintenance are provided for consideration and this constitutes a business. The business is run by the assessee and should be carried on for some time during the previous year. The tax application is sought for the profits of the previous year. The crypto-currency earned in the previous year will fall within the ambit of profits and gains.

The miners can receive fees for the maintenance of the server and ensuring that the frauds, and other such problems are detected. This involves applying analytical skills for solving extremely complex problems by using algorithms. This can qualify as supply of “service” under the CGST Act because of the following characteristics of this transaction. Miners provide a service by maintaining the ledger and receive consideration in form of bitcoin. According to the section 2(31) of CGST Act, a consideration is payment made in money and otherwise. The supply of the service is in furtherance of business and is for the benefit of the consumer. The value of the crypto-currency for the purpose of taxation can be calculated according to CGST Rules, 2017 regarding valuation and section 15 of the CGST Act, 2017 because they regulate the determination of consideration for supply if it is not money. After valuation of crypto-currency, GST can be levied on the basis of the rate decided by the GST Council.

3- Taxation of crypto-currency exchanges and businesses accepting crypto-currency

The businesses facilitating the acquisition and trading of crypto-currencies primarily perform two functions: (1) Facilitate the transfer of crypto-currencies amongst users, similar to the way a stock exchange facilitates the transferof securities between the trading members and (2) Supply crypto-currencies to the users in exchange of other virtual or real goods. These services can be classified as “service” under Section 2(102) of the CGST Act. Section 7(1) provides for supply of services and Section 7(1A) along with entry 5 in Schedule II of the CGST Act provides for the meaning of supply of service. It can be deemed that the trading platforms by providing a service as they agree to facilitate the buy, sale or transfer of cryptocurrency on behalf of the account holder, contribute to the supply of services under this ambit.

Any transaction that involves exchange of money for crypto-currencies or vice versa would attract GST on the value of the transaction as well as the commission charged as the exchange of cryptocurrency would be considered as supply of goods for a consideration and the transaction fee levied would be considered as commission for the provision of service. The taxable value of supply can be determined by open market supply, or with the value of supply of similar goods and services. Given the varying tax rates applicable according to the nature of the goods and/or services availed, the tax rate levied would be the one which is applied for such goods or services. These transactions would also attract Income Tax under the head of “Profit and Gains from Business and Profession” as per Section 28 of the IT Act, 1961.


The application of the country’s current tax framework on the volatile cryptocurrency industry, could give rise to major issues like its valuation and double taxation. Since there is an absence of a regulatory authority to verify cryptocurrency transactions, in light of the taxable income that it is expected to generate, it is critical that the government develops a regulatory framework for its taxability in order to prevent its misuse. Therefore, the author recommends a stringent set of laws governing cryptocurrency and its related transactions, while also acknowledging the numerous benefits that it may bring to the economy.

114 views0 comments


bottom of page