Cryptocurrencies: Their Nature and Prospects for Taxation – Part 2

[Anirudh Singh is a 4thyear B.A LL.B (Hons.) student at NALSAR University of Law, Hyderabad. This is the second post in the series, the first of which can be accessed here]

Cryptocurrencies are decentralized in nature, and no governmental authorities are responsible for the success or failure of transactions in Bitcoins. However, quite recently, some countries, which have accepted crypto currencies as legal and tradable, have been subjected to certain norms and disclosures by the exchanges and persons dealing in them. By possessing such heterogenous attributes, it becomes even more difficult to classify a cryptocurrency into a commodity, a coin, a security, a good or a service. In this post, I analyze whether Bitcoins constitute “money” and discuss the relevant direct taxation prospects on the income which arises from cryptocurrencies.

Are Bitcoins “Money”?

Under section 2(75) of CGST Act, 2017, “money” is defined as follows:

Indian legal tender or any foreign currency, cheque, promissory note, bill of exchange, letter of credit, draft, pay order, traveller cheque, money order, postal or electronic remittance or any other instrument recognized by the Reserve Bank of India when used as a consideration to settle an obligation or exchange with Indian legal tender of another denomination but shall not include any currency that is held for its numismatic value.

Relying on P. Ramanatha Aiyar’s Law Lexicon, a legal tender means a tender made in legal notes or coin. According to section 22 of Reserve Bank of India Act, 1934, the Reserve Bank of India (RBI) has the sole right to issue bank notes (except one rupee notes and coins which are issued and minted by the Central Government under the Coinage Act, 2011) in India. Moreover, according to section 26 of RBI Act, every bank note will be a legal tender and, according to section 2 of Legal Tender (Inscribed Notes) Act, 1964, a note bearing the insignia of a political character shall not be considered as a legal tender. Therefore, applying the strict definition, Bitcoins are not legal tender as they have not been issued by the Central Government or the RBI.

The Indian Government’s stand on the validity of cryptocurrency has been made clear by the speech of India’s Finance Minister, Mr. Arun Jaitley, wherein he explicitly said that the cryptocurrency will not be rendered as a legal tender in India. This announcement had two repercussions. The first is that virtual currency like Bitcoin will not be considered as a legal tender and, therefore, whoever invests in the same does so at his own risk. Second, the practice of transacting in Bitcoins is not banned altogether but there is no redressal mechanism for matters involving cryptocurrencies in India.

On July 6, 2018, the move to ban cryptocurrencies took hold in India wherein RBI instructed banks to shut down all accounts, including those of investors, which deal with Bitcoin and other similar currencies. This included the freezing of accounts which were involved in Bitcoin related transactions. The ban impacted 50 lakh Indians who invested in cryptocurrencies, as well as India’s crypto exchanges. To make the matters worse, the Supreme Court of India refused to impose a stay on the RBI circular prohibiting banks and financial institutions from dealing in virtual currencies. The bench comprising of Chief Justice Dipak Misra and Justices A.M. Khanwilkar and D.Y. Chandrachud, while hearing a petition filed by the Internet and Mobile Association of India (IAMAI) challenging the 6 April RBI circular, opined that cryptocurrency was never a legal tender in India and RBI has the mandate to hear the representations made by the concerned parties.  Therefore, this makes it clear that Bitcoins cannot be used as a method of payment and settlement.

 However, it is essential to understand whether Bitcoins fulfill the characteristics of “money” even though they are not legally recognized?

Irrespective of the form, money is usually coupled with two various functions. First, money is a medium of exchange used as an intermediary in trade to evade the difficulties of a barter system. Second, money provides a basic unit of account. It plays the role of a standard numerical unit for the evaluation of goods and services to make different purchasing options comparable in market. However, in order to be an efficient system of accounting, it needs to be more accurate in accounting terms. It must provide a method of relative worth which users can understand at an intuitive level; otherwise, users must expend time and effort to ascertain what the currency is and what its related unit of accounting really means. Moreover, a currency can only be an effective unit of account only if people accept its legitimacy. It should also be considered that money in various forms is interchangeable without losing its basic value. An example is that of a bank where money lying in it can be converted into physical currency of same amount.

It can be said without any doubt that Bitcoins can be used a medium of transaction. However, taking consideration of various rules and regulations about the modern currency system, the phenomenon of trading in Bitcoins is still dormant in the market. To ascertain the value of virtual currency, the buyers or sellers make an estimation of the standard value of Bitcoins prevalent at that time. Owing to the scarce information about Bitcoins in the market, hardly anyone can decide the exact value of same. This makes the ascertainment of cost of goods payable via Bitcoins problematic as the information of its value is inadequate in market. At any time, the market for Bitcoins may cease to exist because of its volatile nature. Moreover, for addressing the peculiarities regarding Bitcoins, there exists a state of nullity as there are no preventive regulations that can operate to guide the same. Bitcoins cannot be converted into physical form of money, unlike legitimate currencies which can be converted into various other forms. In sum, Bitcoins to some extent fulfill the condition of “money” as it is used as a medium of trade, although under highly restrictive regulations.

Taxability of Bitcoins

The term “income” is defined in section 2(24) of the Income Tax Act, 1961. As it is an inclusive definition, it covers in itself any profits or gains derived by assessee. Therefore, any gains made on buying and selling of Bitcoins will be assessable. The definition of “capital asset” under section 2(14) covers assets of any kind in addition to the types of property defined in it. In J.N Duggan v CIT, the Bombay High Court held that the term “property” as envisaged by section 2(14) of the Act is of wide ambit and the wording of the statute has recognized this by adding the words “of any kind”. Therefore, by the virtue of this definition, any right which can be called as property will be covered into the ambit of “capital asset”. Moreover, the Bombay High Court in Nila Shah v CIT opined that the term “property” is an inclusive term which incorporates the benefit and interest of an individual who is holding the said property. Every likely interest which an individual vests can be termed as “property” within the meaning of capital asset. 

Business Income or Capital Gains?

From the aforementioned judgments, it is clear that the term “property” covers any interest which elicits profits or gains to the assessee. As argued previously, the ownership of Bitcoins does not grant any rights in personam (rights against a person) or rights in rem (as the rights vested by the ownership of Bitcoins are not recognized at large). Therefore, the same cannot be dealt as a “capital asset”. Consequently, income from Bitcoins can be termed as “business income” if the same is generated for business purposes or can be labeled as income from “other sources”.

If a person frequently deals in cryptocurrency as stock in trade, the gains therefrom would be taxable as profits and gains of business. If it imports or exports goods, the fluctuations in the prices of Bitcoins would form part of consideration paid or received for import or export of goods. It is not clear whether the liabilities for acquisition of any asset are incurred in cryptocurrency and any borrowings are made payable in cryptocurrencies. If so, the transactions would attract the provisions of section 43A of the Income Tax Act.

The definition of “capital asset” provided in section 2(14) of the Act is wide enough to include property of any kind held by an assessee, whether or not connected with its business or profession. Although the expression “property” is not defined, yet it signifies every possible interest a person can acquire, hold or enjoy. Therefore, a cryptocurrency, being an intangible asset, can be deemed as a capital asset and is liable to be taxed as such, depending upon the intention of the person to hold it as an investment or otherwise. If a cryptocurrency is held for a period exceeding 36 months from the date of purchase, it will be considered as long term capital gain and taxed at the rate of 20% with the benefit of indexation. If it is held for a period of less than 36 months from the date of purchase, it will be considered as short term capital gain and taxed as per the rates applicable to the taxpayer.


Bitcoin is a person-to-person first of its kind cryptocurrency which was devised as a replacement for conventional means of money. The cryptocurrency space is a highly volatile one which witnesses drastic changes at a spur of the moment. The prices and volumes of trading have been at an all-time high for most of the aforementioned currencies. Many believe that cryptocurrencies are the future of money while as others suggest it to be very risky one. Meanwhile, the Indian authorities, be it RBI or the Securities and Exchange Board of India have failed to deal with the cardinal issue. With massive amounts entering the fray (cryptocurrency space), the authorities cannot remain silent, as the consequences would become too negative for authorities to bear.

Anirudh Singh

About the author


  • Dear author,

    This piece is indeed excellent and provides us with a great overview of the legal framework surrounding cryptocurrencies in India. However, I seek some clarifications.

    1. How would you defend a law regulating cryptocurrencies, using either Hart’s Concept of Law, or Dworkin’s, The Law’s Empire? This question, I believe is imperative since if we must move from a regime of unregulation to one of strict prohibition, what are the philosophical underpinnings of the same?

    2. The taxation angle, however is well articulated. Would you agree with me if I were to say that taxing cryptocurrencies is rooted in Hans Kelsen’s ‘grundnorm’?

    3. You do not seem to have adequately captured the interface between the FEMA and cryptocurrencies. A search of case law would have been useful. Please do provide us with some applicable jurisprudence on this aspect, especially in the cryptohubs of the world.

    I look forward to answers to the above questions, as I am currently engaged in authoring a piece for a well-reputed law review of an American college, and your contribution shall be duly cited.


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