Bitcoin In India: Is Investing In Bitcoin Illegal?

Bitcoin is a cryptocurrency that enables peer-to-peer transactions without the involvement of governments or banks. It is one of the earliest forms of cryptocurrency, introduced in 2009, and has since gained popularity in India. However, the country's stance on Bitcoin and other cryptocurrencies has been ambiguous, with a high-level government panel recommending a ban on all virtual cryptocurrencies. This has led to confusion among Indians about the legality of investing in Bitcoin. While there is no clear law banning it, the government has imposed taxes on gains from cryptocurrency transactions, and the Reserve Bank of India had cautioned the public about its use in the past.

Bitcoin is not illegal in India

However, there are no clear laws and regulations that exist to monitor Bitcoin. The Indian government has expressed concerns over the use of Bitcoin for illicit activities such as money laundering, tax evasion, and terrorism financing. The government intends to prevent the illegal usage of cryptocurrencies.

In the Union Budget of 2022, the government imposed a 30% tax on gains from cryptocurrencies and a 1% tax deducted at source.

The Indian government has imposed a 30% tax on cryptocurrency gains

Investing in Bitcoin and other cryptocurrencies in India is neither illegal nor fully regulated. In 2018, the Reserve Bank of India (RBI) attempted to ban cryptocurrencies, but the Supreme Court quashed the ban, leaving cryptocurrencies in a regulatory limbo.

In 2022, the Indian government imposed a 30% tax on gains from cryptocurrencies and non-fungible tokens (NFTs), which are now classified as "Virtual Digital Assets" (VDAs). This tax applies to all investors, and there is no distinction between short-term and long-term gains. The 30% rate is the same as that imposed on other assets that the government appears to disapprove of, such as lottery winnings.

• Taxable Events: The tax applies to the conversion of virtual digital assets to Indian rupees or other fiat currencies, the exchange of one type of virtual digital asset for another, and the use of virtual digital assets to pay for goods and services.
• Tax Rate: A flat tax rate of 30% is levied on any profits made from the transfer of virtual digital assets, regardless of whether it is classified as investment income or business income. This rate is in line with India's highest income tax bracket.
• No Deductions Allowed: Only the cost of acquisition is allowed as a deduction when reporting income from the transfer of virtual digital assets. Other expenses, such as electricity or infrastructure costs, cannot be included.
• Loss from Digital Assets: Losses from virtual digital assets cannot be set off against any other income. This means that if an individual incurs a loss on one type of virtual digital asset and a gain on another, they cannot offset the loss against the gain.
• Gifting of Digital Assets: The gifting of virtual digital assets, such as cryptocurrencies or NFTs, is taxed in the hands of the receiver. If the value of the gift exceeds a certain threshold, the recipient may be liable to pay taxes.
• Tax Deducted at Source (TDS): A 1% TDS is applicable on all sell transactions of virtual digital assets, including cryptocurrencies and NFTs. This means that the buyer is responsible for deducting 1% of the payment made to the seller and remitting it to the government.
• Mining Cryptocurrency: Income from mining cryptocurrency is taxed at a flat rate of 30%. However, the cost of acquisition for crypto mining is considered 'zero', and no expenses such as electricity or infrastructure costs can be included.
• Staking Crypto: Income from staking crypto is also taxed at 30%. Additionally, when the staked crypto is sold, the 30% tax will apply to any gains made.
• Reporting Requirements: Gains or income from virtual digital assets must be reported in the tax returns. For individuals, this is done through the Income Tax Return forms, while institutions or businesses use separate forms.
• Timeline: The 30% tax on cryptocurrency gains became effective from April 1, 2022, and the 1% TDS on sell transactions became effective from July 1, 2022.

There is no law banning the use of Bitcoin in India

India has had a somewhat tumultuous relationship with Bitcoin and other cryptocurrencies. In 2018, the Reserve Bank of India (RBI) imposed a banking ban on the buying and selling of cryptocurrencies, cooling off a market that had only just started to gain momentum. The RBI stated that any entity regulated by it, such as banks and wallets, should not deal with or provide services to individuals or businesses for the buying or selling of cryptocurrencies.

However, despite this ban, Indians could still engage in peer-to-peer transactions to trade cryptocurrencies. In March 2020, the Supreme Court of India lifted the banking ban on cryptocurrency firms, and in a separate ruling in February 2019, asked the government to come up with cryptocurrency regulation policies.

Today, there is still no law banning the use of Bitcoin in India. In fact, in 2021, the government initiated a series of discussions with stakeholders in the crypto industry. While a cryptocurrency bill is still pending, the government's Union Budget speech that year proposed taxing cryptos, which was seen as a step towards legitimizing them.

The government has expressed concern over the use of Bitcoin for illicit activities such as money laundering, tax evasion, and terrorism financing. In 2022, the government proposed some tax provisions for the sale, purchase, and transfer of cryptocurrencies in the Union Budget. A flat 30% tax is charged on income from the transfer of digital assets, with a 1% TDS deducted on the payment by the buyer if the amount crosses a certain threshold.

While the legality of Bitcoin and cryptos has not been explicitly discussed, it is not illegal to trade in cryptocurrencies in India. Exchanges like WazirX operate on self-imposed regulations, holding users to the same standards as traditional exchanges.

The Supreme Court of India lifted the banking ban on cryptocurrency firms in 2020

In 2020, the Supreme Court of India lifted the banking ban on cryptocurrency firms, allowing banks and financial institutions to resume crypto-based transactions. This ruling was made in favour of petitions by crypto exchanges and startups that opposed the decision made by the Reserve Bank of India (RBI) in April 2018, which banned domestic financial institutions from providing banking services to crypto exchanges.

The central bank's decision forced crypto exchanges in the country either to close, relocate to other jurisdictions, or shift their business model to crypto-to-crypto and over-the-counter trading. While the crypto exchanges immediately filed petitions to the Supreme Court, a clear decision was not reached until several rounds of hearings had taken place, and some exchanges were forced to close as trade volumes plummeted.

The Supreme Court's ruling stated that the RBI's decision was set aside because it failed the test of proportionality, meaning it had not been balanced in how it treated crypto firms. The court acknowledged that there was no unified definition of cryptocurrencies and recognised that this uncertainty could lead to virtual currencies slipping out of all regulatory control. It was believed that they should consider the foundational objectives of cryptocurrencies, which serve as a store of value, a unit of account, and a medium of exchange.

The ruling was considered a win for crypto-based entities and was hoped to influence the government's decision-making towards more balanced regulation. However, it was also cautioned that the verdict could be a short-term respite, as it did not directly impact actions on the policy level. The industry still faces hurdles, as a government panel has recommended a ban on all private cryptocurrencies, with jail time of up to 10 years and heavy fines for anyone dealing in digital currencies.

The Reserve Bank of India (RBI) had imposed a ban on banks dealing in cryptocurrencies in 2018

In April 2018, the Reserve Bank of India (RBI) imposed a ban on banks and financial institutions providing any services related to virtual currencies such as Bitcoin. The RBI had been cautioning users of cryptocurrencies since 2013 and considers cryptocurrency a digital means of payment that could jeopardise the country's payment system. The 2018 ban aimed to "ring-fence" India's financial system from private virtual currencies, deemed illegal by the government.

The RBI contended that it was empowered to make decisions banning cryptocurrencies. However, the Internet and Mobile Association of India (IMAI) argued that cryptocurrency is not strictly a currency but more of a commodity. They asserted that the RBI did not have the authority to impose such a ban without a law prohibiting cryptocurrency.

The 2018 ban did not completely stop cryptocurrency transactions in India. Indians could still engage in peer-to-peer transactions to trade cryptocurrencies. In March 2020, the Supreme Court of India lifted the banking ban on cryptocurrency firms, allowing banks and financial institutions to resume crypto-based transactions. The court also ordered the government to take a draft regulation and increase transparency in the matter.

Today, India is one of the many countries where cryptocurrencies are legal, and citizens can invest in a range of crypto assets. However, it is important to note that cryptocurrencies are not regulated by any central authority in India, and there are no specific rules or guidelines for settling disputes related to cryptocurrency transactions.

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