Disclaimer: This write up is only for the purpose of knowledge and doesn’t encourage tax evasion via Bitcoin.
“Bitcoins ko taxable karne ka intezaar toh kai mulkon ki govt kar rahi hai, magar ise tax karna mushkil hi nahin,…ahem ahem….”
There are concerns over taxability of Bitcoins. Though Central Board of Direct Taxes (CBDT) has not issued any guidance on Bitcoins’ taxability, logical conclusion is that Bitcoins can be treated as capital assets, with the sale resulting in capital gains (long term or short terms, depending on period of holding). Short term capital gains are taxable at slab rate, while long term capital gains are taxed at 20% with indexation. However, if a person is involved in trading of Bitcoins, it will be treated as business income. The government may even treat it as speculative income and charge it at 30% tax rate.
Aap samajh rahe hain mai kya keh rha hu?? Never mind! Read further, you’ll still understand.
In spite of all these logical provisions and conclusions, Bitcoin serves as a tax haven for unaccounted money. Tax evasion via Bitcoin is much easier. Let us understand how:
“Bitcoin was born as a new age decentralized, peer-to-peer currency that is not issued, controlled or regulated by any single government or central bank. One of the key aspects of Bitcoin is the distributed ledger system called the block chain which controls the peer to peer transactions that happen over the Bitcoin network.”
This means the transaction in Bitcoin is peer to peer and completely anonymous. You only need to have a Bitcoin account and remember the private key of your account, and you can access and use Bitcoin from any part of the world. Transfer happens in a similar way as in case of payment wallet. So, how can tax be evaded?
- Barter transactions via Bitcoins: Let’s say you render a service, say, website development to a person in any part of the world. That person offers you consideration in the form of 2 Bitcoins. You open a Bitcoin account and receive 2 Bitcoins in your account. Remember, the government doesn’t know that you have received 2 Bitcoins, since this account is anonymous and KYC compliance are not mandatory.
Had you received this amount in Rupees or Dollars or any other legal tender, it would have been considered as revenue, and hence taxed, after deduction of some expenses.
Now, if you encash these 2 Bitcoins by converting them into Rupees, and get them credited in your bank, it will become taxable, since it came into the governmen’s eye.
But, what if you don’t encash them, and let them stay in the form of Bitcoins only? You got me right! You bought goods or service from someone and having 2 Bitcoins in your Bitcoin account, you paid them in Bitcoins only. See, you have no Bitcoins left, and there is no trail of transaction in your bank account. You didn’t disclose your revenue to the government, and hence, escaped from paying tax.
- Buying Bitcoins in Cash: This is another way of tax evasion via Bitcoin when you have physical cash. Although Bitcoins can be purchased from Bitcoin exchange via electronic mode, they are being sold in cash as well. Websites like localbitcoin.com are intermediaries where cash buyers and sellers of Bitcoin meet each other. Let’s say X has Rs 1 crore black money lying with him. He comes across Y who is selling Bitcoins and want cash as a consideration, so that he need not disclose it to the government to avoid tax. X buys Bitcoin from Y for Rs 1 crore, and sells them to Z for Rs 1.30 crore when its value increased. See, X made a gain of Rs 30 lakh, and still didn’t pay tax as he dealt entirely in cash, and there is no trail of cash transactions with complete anonymity. He escaped the incidence of tax.
Tax evasion is one reason why Bitcoin prices are sky rocketing. There is a huge demand for them. Selling in the form of Bitcoin is hidden, and with no trail of transaction, there is no incidence of tax. Everything happened anonymously.
This is one reason why it is being used by money launderers and Hawala traders.
When do Bitcoins become taxable?
Bitcoins become taxable when they are converted into legal tenders like Dollar or Rupee or any other currency. Example: You bought Bitcoins when its market value was Rs 10 lakh, and you sold them when its market value was Rs 12 lakh. The capital gain in Rs 2 lakh. Its taxability will be dependent on whether it’s a long term capital gain or short term capital gain.
It will also be taxable when you receive consideration in the form of Bitcoins. Example, you rendered a service worth 2 Bitcoins, and market value of 2 Bitcoins is Rs 24 lakh on that day, your taxable sale will be Rs 24 lakh. However, it is to be noted, as discussed above, it will be taxed only when it is converted into fiat money. Otherwise, it remains undisclosed.
If a trader is dealing in Bitcoins, it will be classified as a business income.
At the end of this article, I repeat again that this is only for the purpose of knowledge, and we all must pledge to merely understand it, only to develop ways to stop this circulation of unaccounted money, and not to encourage the use of such methods. Hope it will be taken in a right spirit. 🙂
Also Read: Is investment in Bitcoin safe?