Indian Crypto Tax Laws

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Cryptocurrency and Social Justice: a Study of Indian Taxation Laws on
Emerging Virtual Challenges
Article in SSRN Electronic Journal · January 2020
DOI: 10.2139/ssrn.3615059
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CRYPTOCURRENCYAND SOCIAL JUSTICE
A STUDY OF INDIAN TAXATION LAWS ON EMERGING VIRTUAL CHALLANGES
- Prakhar Harit
ABSTRACT
A democratic form of Govt. is always defined as “by the Public, for the Public and to the
Public.” The basic function of a government is to deliver public services to its citizens for
which it requires resources to finance its expenditure. Among others, taxation works as a major
source to fund public expenditure. Developments and Advancements in the technologies, has
enabled the Govt. to identify new ways and opened new platforms to collect taxes. Among
them, comes the curious situation of taxation of Cryptocurrency. Unlike the fiat currency,
Cryptocurrencies are decentralized, relying on a peer-to-peer network that operates without any
third-party intervention like the Central Bank. The purpose of this paper is to explore
Cryptocurrency and the prevailing regulatory structure concerning them. It studies the different
natures of cryptocurrency and analyses (1) Scheme of existing domestic laws and relates
cryptocurrency, (2) Domestic laws affecting taxation of cryptocurrency related activities and
(3) Major economies response to cryptocurrency.
INTRODUCTION
“For in every country of the world, I believe, the avarice and injustice of princes and
sovereign states abusing the confidence of their subjects, have by degrees diminished the real
quality of the metal, which had been originally contained in their coins.”1
Rapid advancement in information and communication technologies (ICTs) has brought new
approaches in the field of public administration. Concepts such as Accountability,
Transparency, Effectiveness, and Productivity have become important tools for the Public
Sector and theoretically, Cryptocurrency aims at such concepts itself. The idea for integrating
1
ADAM SMITH, AN INQUIRY INTO THE NATURE AND CAUSES OF THE WEALTH OF NATIONS 43
(1776); Also See F.A. HAYEK, DENATIONALISATION OF MONEY - THE ARGUMENT REFINED (3rd ed.,
1990).
Electronic copy available at: https://ssrn.com/abstract=3615059

the blockchain technology into the tax system would not only create a positive development
but also enhance the overall taxation system. As research2
notes, the following are the feature
that can affect the tax system:
a) Transparency: Blockchain technology allows the traceability of provenance of
transactions.
b) Controllability: Only identified users have permission accession network
c) Security: Once the data has been entered digitally, one can’t tamper or alter the digital
ledger which helps in tracing and preventing fraud easily.
d) Real-time information: Everyone in the network can see and analyze the updated
information at the same.
As of 2020, there exist hundreds of cryptocurrencies in function, but the most tradable
cryptocurrency is ‘Bitcoin’. Bitcoin is the world's first private and digital cryptocurrency that
functions on peer-to-peer network3
. Like any other scripts/stock of a public listed company,
even buying and selling of bitcoins are traded over central bitcoin exchange.4
Talking of
advantages, one study has claimed that the growth of bitcoins will have tremendous benefits in
making banking accessible to the marginal population without any need for intervention by a
third party.5
Furthermore, Several Countries such as the Philippines, Japan, and even Russia
acknowledged its role in the banking system and enforced regulations to govern
cryptocurrency.6
Speaking of definition, there’s no legal definition of Cryptocurrency in our domestic laws.
However, the Cambridge dictionary defines ‘Cryptocurrency’ as:
“a digital currency produced by a public network, rather than any government, that
uses cryptography to make sure payments are sent and received safely”7
2
Transparency through Decentralized Consensus: The Bitcoin Blockchain and Beyond; https://freidok.uni
freiburg.de/fedora/objects/freidok:11559/datastreams/FILE1/content (Last visited on May 10, 2020);
3
Coin Market Cap, Cryptocurrency Market Capitalizations, available at https://coinmarketcap. com (Last visited
on May 10, 2020)
4
How to Sell Bitcoin, available at https://www.coindesk.com/learn/bitcoin-101/how-to-store-your-bitcoins (last
visited on May 10, 2020)
5
Brett Scott, How Can Cryptocurrency and Blockchain Technology Play a Role in Building Social and Solidarity
Finance? 5-13 (United Nations Research Institute for Social Development Working Paper Group, Paper No. 2016-
1, 2016) available at http://www.unrisd. org/brettscott (Last visited on May 10, 2020);
6
Jens Kalaene, Russia to End Cryptocurrency Limbo by Proposing Regulation, September 25, 2017, available at
https://www.rt.com/business/404468-russia-bitcoin-bill-regulation/ (last visited on May 10, 2020);
7
https://dictionary.cambridge.org/dictionary/english/cryptocurrency

Countries around the world run on fiat currency which is issued by their Central Banks and the
possessing value of such currency is decided through a Government decree.8
As stated, there’s
one Central Bank which issues and regulates the fiat currency. But such a system suffers from
an intrinsic weakness of the trust-based model, where the citizens trust financial institutions to
process payments.9
To leap against this trust-based model, Cryptocurrency presents a different
process. With a decentralized model and without any intermediaries, Cryptocurrency functions
entirely on the basic demand-supply mechanism, having no intrinsic values and no reserves.10
This not only offers a near-perfect system to transact but also includes anonymity and
transparency at the same time11
.
Through this paper, I try to analyze the confusing aspect of natures of cryptocurrency and the
development in the Indian Cryptocurrency market after the Indian Supreme Court judgment. I
have further analyzed different stand taken by the major economies around the world
concerning cryptocurrency. For this, I’ve divided this paper into 6 Parts. Part I shall deal with
stands taken by the Government of India concerning Cryptocurrency and its trade. Part II shall
deal with the Judicial approach which will include how the judiciary has attempted to define
cryptocurrency. Part III deals with the breakthrough after the Indian Supreme Court Judgement
on Cryptocurrency. Whereas, Part IV shall deal with the taxation of Cryptocurrency related
activities after the 2020 Judgement. Part V includes evolving international practices regarding
cryptocurrency which includes how the world at large is dealing with imposing taxes on
Cryptocurrency. Finally, Part VI provides for the conclusion.
I. CRYPTOCURRENCY AND INDIAN GOVERNMENT
Bitcoin, along with other cryptocurrencies, has been operating in the Indian market for a long
while. It was as early as 2012 when small scale Bitcoin transactions were reported in India for
the first time.12
By 2013, Bitcoins started gaining popularity among masses and few businesses
began accepting Bitcoin payment alongside Indian currency. With the arrival of BtexIndia,
8
Abba P. Lerner, Money as a Creature of State, 37 THE AMERICAN ECONOMIC REVIEW 2 (1947).
9
Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System, 1-5, available at https://
bitcoin.org/bitcoin.pdf (Last visited on May 10, 2020).
10
International Monetary Fund, Virtual Currencies, and Beyond: Initial Considerations, available at
https://www.imf.org/external/pubs/ft/sdn/2016/sdnl603.pdf (last visited on May 10, 2020).
11
Supra Note 02
12
Bitcoin gains currency in India; Available at https://www.thehindu.com/business/Industry/bitcoin-gains-
currency-in-india/article5422252.ece (Last visited May 12, 2020)

Unocoiun, and Coinsecure, cryptocurrency exchanges began to spring up within the Country.
Later, few more exchanges like Zebpay, Koinex, and Bitcoin-India made up to the list. This
increase in demand for Cryptocurrency in India attracted the Government and Regulator's
(Reserve Bank of India) attraction. Needless to Mention, the Reserve Bank of India can ‘either
regulate or prohibit anything that may pose a threat to or have an impact on the financial system
of the Country’.13
RBI, exercising its regulatory power14
a passed slew of circulars/directions
to contain the growth of Cryptocurrency in India.
1. It was in the December of 2013 when RBI for the first time passed a notice cautioning the
users, holders, and traders of cryptocurrency about the “Potential financial, operational,
legal, consumer protection and security related risks that they are exposing themselves to”15
2. In February 2017, RBI noted that it has not given any “license/ authorization to any entity/
company to operate such schemes or deal with Bitcoin or any virtual currency”16
3. Again, in December 2017, upon noting the significant and rapid growth of cryptocurrency
values and ICO Activities, RBI cautioned the public against Cryptocurrency.17
4. In April 2018, through a decree passed by RBI, it declared that all RBI Regulated bodies
(ex. Banks) were prohibited from having any business relationships with entities dealing
with cryptocurrencies. Furthermore, those who have an existing business with such entities
were asked to end the relationship within three months.18
Blockchain companies have faced a challenging regulatory and political environment since its
inception in India. With Bitcoin exchange being raided by Enforcement Directorate on the
charge of violation of Foreign Exchange Management Act (FEMA)19
to conducting surveys of
nine cryptocurrency exchange on account of tax evasion20
, the Indian Cryptocurrency market
13
This interpretation of powers vested in RBI was given by the Apex Court in the case of the Internet and Mobile
Association of India v. RBI. (2020 SCC Online SC 275). Detailed analysis of this judgment in the latter part.
14
Ibid. Court noted that “Nothing prevented RBI from notifying VCs under the category of “other similar
instruments” indicated in Section 2(h) of FEMA, 1999 and to pass circulars”
15
RBI (2018a) Reserve Bank of India, https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=3 0247
16
RBI (2016) RBI cautions users of virtual Currencies,
https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx? prid=39435
17
RBI (2017) Reserve Bank cautions regarding the risk of virtual currencies including Bitcoins,
https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=4 2462
18
RBI (2018b) Edited Transcript of Reserve Bank of India’s First Bi-Monthly Policy Press Conference,
https://www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=3465
19
ED officials raided two bitcoin trading firm in Ahmedabad; Available at
https://economictimes.indiatimes.com/news/economy/finance/ed-officials-raided-two-bitcoin-trading-firm-in-
ahmedabad/articleshow/28006859.cms?from=mdr (Last visited May 12, 2020)
20
Bitcoin exchanges under IT radar, survey at 9 exchanges across the country

has faced a tough approach by the Government. In fact, in early 2018, the then Indian Finance
Minister in his annual budgetary speech noted: "The Government does not consider crypto-
currencies legal tender or coin and will take all measures to eliminate the use of these crypto-
assets in financing illegitimate activities or as part of the payment system”21
The government of India is yet to bring any legislation concerning the regulation of
Cryptocurrency in the Indian market. However, a draft bill for banning cryptocurrency has been
in the works.22
According to the draft “Banning of Cryptocurrency and Regulation of Official
Digital Currency Bill 2019", If any person either holds, sells, transfers, dispose of, issue or
deals in cryptocurrencies, he shall be liable for imprisonment which may extend till 10 Years.
This bill further makes holding of any cryptocurrency a non-bailable offense.23
II. LEGAL APPROACH TO THE EMERGING CRYPTOCURRENCY
MARKET
Subject matters upon which Central/State Govt. can legislate is given under the Seventh
Schedule of the Constitution of India, 1950. Under Article 246 r/w Entry 36 of List-I of
Schedule VII, Central Government has the power to legislate on the subject matters related to
currency, legal tender, and foreign exchange. But the question arises, can 'Cryptocurrency' be
the same as 'Currency' for Indian Laws or the Government making the draft bill an act of
Colorable Legislation?24
There has always been confusion as to the nature of 'Cryptocurrency' i.e. Whether it is a
Currency or a Commodity or a Security. To make it simpler, if I could divide people into three
sets, where one set of people believes that since cryptocurrency acts like any other currency,
Available at: https://www.oneindia.com/india/bitcoin-exchanges-under-it-radar-survey-at-9-exchanges-across-
the-country-2601156.html (Last visited May 12, 2020)
21
Venkateswaran, A. (2018) Budget 2018: Bitcoin in India is Dead. Long Live Blockchain
https://thewire.in/banking/budget-2018-bitcoin-india-dead-lon g-live-blockchain (Last visited May 13, 2020)
22
Draft Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019. Available at
https://www.prsindia.org/billtrack/draft-banning-cryptocurrency-regulation-official-digital-currency-bill-2019
(Last visited May 13, 2020)
23
See Section 8 of the Draft. available at
https://www.prsindia.org/sites/default/files/bill_files/Draft%20Banning%20of%20Cryptocurrency%20%26%20
Regulation%20of%20Official%20Digital%20Currency%20Bill%2C%202019.pdf (last visited May 13, 2020)
24
For more details about the Doctrine of Colourable Legislation, consider reading Saji Cheriyan v. The State of
Kerala (A.I.R. 1960 S.C. 801.). In this case, Court expounded upon this doctrine and concluded "what cannot be
done by legislature directly also cannot be done indirectly" i.e. if the legislature doesn't have the power vested
under Schedule VII to legislate upon Cryptocurrency, then it can't legislate upon it by saying it to be Currency.

so it should be considered as ‘currency’25
whereas the other set believes that since
cryptocurrencies are bought and sold for fiat money, it should be considered as ‘commodity’26
but the rest believes that since the nature of Cryptocurrency is more of a ‘security’ that can be
traded in the crypto-exchange.27
In the ongoing discussion I’ll enumerate upon each of the
mentioned natures and whether our existing laws support these claims.
A. CRYPTOCURRENCY AS CURRENCY:
Major characteristics of a currency like mode of exchange, a unit of account, and store of
value are satisfied when it comes to Cryptocurrency.28
It was even recognized as money by
the US courts because of its ability to purchase in exchange for money.29
However, Indian
laws don't categorize Cryptocurrency as a 'currency'.
Sec. 2(h) of the Foreign Exchange Management defines ‘Currency’ where it includes “all
currency notes, postal notes, postal orders, money orders, cheques, drafts, traveler's
cheques, letters of credit, bills of exchange and promissory notes, credit cards or such other
similar instruments, as may be notified by the Reserve Bank”.30
To date, RBI hasn’t
provided any definition of digital and virtual currency nor have they considered it to be
legal tender to date. FEMA further defines ‘Foreign Currency’ as “any currency other than
Indian Currency.”31
Whereas the term ‘Indian Currency’ includes “Currency which can be
drawn or expressed in Indian Rupees.32
The RBI Act, also defines ‘Foreign Currency' in
the same terms as FEMA.33
However, instead of solving the conundrum, the term ‘foreign
currency’ adds up to the pile of pre-existing confusion. As we will see in detail in later part
25
Crypto could replace fiat money, Deutsche Bank report predicts. Available at https://ibsintelligence.com/ibs-
journal/ibs-news/crypto-could-replace-fiat-money-deutsche-bank-report-predicts/ (Last visited May 13, 2020)
26
CFTC Chairman Confirms Ether Cryptocurrency Is a Commodity. Available at https://www.coindesk.com/cftc-
chairman-confirms-ether-cryptocurrency-is-a-commodity (Last visited May 13, 2020)
27
SEC chairman explains how it classifies cryptocurrencies as securities. Available at
https://thenextweb.com/hardfork/2019/03/12/sec-cryptocurrency-securities-law/ (Last visited May 14, 2020)
28
Canada Tax Foundation, Rebooting Money: The Canadian Tax Treatment of Bitcoin and Other
Cryptocurrencies, January 10, 2015, available at https://www.dwpv.com/assets/-
/media/F28E60C148DB463DB31EOCF66008FD2A.ashx (last visited May 14, 2020).
29
See United States v. Faiella, 39 F Supp 3d 544, 545, (SDNY 2014); Also, SEC v. Shaver's, No. 4: 13-CV 416,
2013 WL 4028182.
30
Sec. 2 (h) of The Foreign Exchange Management Act, 1999
31
Sec. 2 (m) of The Foreign Exchange Management Act, 1999
32
Id.
33
Id., Sec. 2(bix).

of this research, there’re few countries like Germany, which has accepted cryptocurrency
as a Foreign Currency34
. So, does that mean Cryptocurrency to be treated on the same terms
as the United States Dollar or Euro or Yen?
Foreign Currency refers to the currency accepted as a legal tender in some other country.
If we go with that conclusion, Countries like Japan have already started accepting
Cryptocurrency as a form of currency itself. So, in that case, Cryptocurrency can be said to
be a form of foreign currency and can be seen on the same terms as any other fiat currency
but not a domestic currency.
B. CRYPTOCURRENCY AS COMMODITY
When we refer to commodities in general, we generally point to the raw material that can
be bought and sold, such as coffee, rice, etc. In terms of Cryptocurrency, a person can buy
cryptocurrency from the crypto exchange by paying fiat money, and then the same can be
sold over the crypto exchange instead of the fiat money. Because of this quality of
Cryptocurrency, it is often termed as a Commodity rather than a Currency.
There’s no such definition prescribed under any domestic law that can define Commodity.
However, in Tata Consultancy Services35
Hon’ble Apex Court defined Commodity to
include, goods of any kind, something of use, or an article of trade and commerce.
Cryptocurrency, having an intangible existence, leaves a wide scope for being categorized
as a commodity under Indian Law. Article 366(12) of the Indian Constitution gives an
exhaustive definition for goods where it includes "all materials, commodities, and
articles"36
In Bharat Sanchar Nigam Ltd37
, Hon’ble Supreme Court gave an expansive
interpretation to Goods under Article 366(12) and held that “Goods includes both tangible
and intangible property that is capable of consumption, abstraction or use and can be
transmitted, delivered, transferred, stored, possessed, etc.” Being an intangible commodity,
which can be stored and transferred, Cryptocurrency qualifies the definition of 'Goods'
given by the Supreme Court.
34
Emilie Spaven, Germany Officially Recognises Bitcoin As "Private Money", available at
https://www.coindesk.com/germany-official-recognises-bitcoin-as-private- money/ (Last visited May 14, 2020).
35
Tata Consultancy Services v. State of Andhra Pradesh, (2006) 3 S.C.C. 1.
36
Article 366(12) of the Indian Constitution
37
https://en.bitcoin.it/wiki/Storing_bitcoins

Furthermore, Section 2(7) of Sale of Goods Act, 1930 defines goods to include “every kind
of movable property other than actionable claims and money…”38
. Looking into the nature
of Cryptocurrency, it can be treated as movable property.39
However, if Cryptocurrencies
are treated as Good under Section 2(7), then any payment done through Cryptocurrency
would become a barter exchange that is excluded under Sec. 2(10) of the said act which
considers payment of money as appropriate consideration for the sale of goods.40
Now, in the abovementioned definition of Goods given in Sale of Goods Act, it expressly
excludes money. The Indian Finance Act, 1994 defines Money as “legal tender, cheque,
promissory note, bill of exchange…... or any similar instrument but shall not include any
currency that is held for its numismatic value”41
. Now, as per the Principle of Ejusdum
Genesis i.e. “when general words follow specific words in a statutory enumeration, the
general words are construed to embrace only objects similar in nature to those objects
enumerated by the preceding specific words”42
This definition identifies many instruments
other than legal tender, which can within the definition of money. Looking into the
definition given by the International Monetary Fund, it defines money as anything that can
serve as a store of value, a unit of account, or as a medium of exchange.43
C. CRYPTOCURRENCY AS SECURITY
By now, it’s clear that Cryptocurrency is a tradeable commodity that can be bought and
sold over Crypto-Exchange. In India, Crypto-Exchange like Zebpay facilitates the
trading44
.So the question arises, can Cryptocurrency be termed as Security? If yes, Whether
SEBI will have any Jurisdiction to regulate its trading?
Section 2(h) of the Securities Contract Regulation Act defines Securities to include “Share,
bonds, debenture, derivatives, government securities and such other instruments of like
38
Sec. 2(7) of The Sale of Goods Act, 1930
39
Cryptocurrency as a Commodity: The CFTC’s Regulatory Framework. Available at
https://www.globallegalinsights.com/practice-areas/fintech-laws-and-regulations/1-cryptocurrency-as-a-
commodity-the-cftc-s-regulatory-framework (Last visited May 15, 2020).
40
Sec. 2(10) of The Sale of Goods Act, 1930
41
Sec. 65B (33) of the Indian Finance Act, 1994
42
Circuit City Stores Inc., v. Adams, 532 U.S. 105 (2001)
43
‘What Is Money?’ Available at: https://www.imf.org/external/pubs/ft/fandd/2012/09/basics.htm (Last visited
May 14, 2020).
44
bitcoin in INR: Binance, Wazirx, Cashaa, Zebpay Announce New Offers for India; Available at
https://news.bitcoin.com/bitcoin-inr-india/ (Last visited May 14, 2020)

nature.”45
Speaking of Securities, one of its essential features is its origin. Securities are
generally issued by the issuer company whereas Cryptocurrency, on the other hand, is
decentralized i.e. they're not issued by any legal authority and its acceptance is quite
voluntary. It can be classified as Security only after an official notification by the Central
Government.46
A derivative can also qualify as Security under Sec. 2(h) of the SCRA. As per Sec. 2(ac)
of the SCRA, “Derivatives includes:
(A) A security derived from a debt instrument, share, loan, whether secured or
unsecured, risk instrument or contract for differences or any other form of security;
(B) A contract which derives its value from the prices, or index of prices, of
underlying securities;
(C) Commodity derivatives;
(D) Such other instruments as may be declared by the Central Government to
be derivatives;”47
Generally, Derivative is a kind of financial security whose price is derived from
underlying assets48
. As clear from the definition, they don't have any independent value.
Moreover, it's a contract to hedge risk.49
From these characteristics of Derivates, it’s
quite clear that Cryptocurrency can’t be said to be a derivate as its value from any asset
and its value is purely on demand-supply metrics and it’s not any kind of contract.
III. THE BREAKTHROUGH:
From the above discussion about the nature of Cryptocurrency, it’s quite clear that it can’t be
termed as a Currency or a Commodity or a Security since it doesn’t qualify the legal standards
required under existing domestic laws. However, this conundrum was solved the Supreme
45
The Securities Contracts (Regulation) Act, 1955, Sec. 2(h).
46
The Securities Contracts (Regulation) Act, 1955, Sec. Sec. 2(ii)(a)
47
The Securities Contracts (Regulation) Act, 1955, Sec. 2(h).
48
https://www.investopedia.com/terms/d/derivative.asp
49
Siladitya Chatterjee, Derivatives -A Conceptual Analysis, (2007) 73 SCL 50 (MAG).

Court in the case of Internet and Mobile Association of India v. RBI50
. In this case, Petitioners
challenged the 2018 Circular by RBI where it prohibited RBI regulated bodies (ex. Banks)
from having any business relationships with entities dealing with cryptocurrencies.51
The Court
was challenged with two questions of law:
a) Whether Virtual Currency, a form of money/legal tender, or is it a good/commodity?
b) Whether the Circular issued by RBI in April 2018, a violation of Fundamental Right to
do the business of the traders and facilitators of Virtual Currency?
For the first question, the Court concluded by stating Cryptocurrency to be a form of
Currency. Upon referring to Nathaniel Popper’s book, “Digital Gold: The Untold Story of
Bitcoin” and “A Peer-to-Peer Electronic Cash System” by Satoshi Nakamoto, Court
observed Bitcoin be a “new electronic cash system that’s fully peer-to-peer, with no trusted
third party.” Court called Cryptocurrency as a “Cleverly constructed decentralized network
with no central authority”. Court further referred to the three qualities of money i.e. (a) a
store of value, (b) a unit of account, (c) a medium of exchange, and was convinced with
Virtual Currency (like Cryptocurrency) because of it fulfilling these three fundamental
features of money. With regards to RBI's power to issue such circular, Court held that the
'power to regulate also includes the power to prohibit' and as long as something poses a
threat or an impact upon the financial system of the country, same can be regulated by the
Reserve Bank of India.
For the Second Question, Court applied the Doctrine of Proportionality, expounded in
Dental College52
to study whether the reasonable restriction put through RBI Circulars
weighs more that the fundamental right of the citizen? While testing the case on the
Doctrine, Court enquired ‘Whether the RBI considered a less intrusive measure rather than
prohibiting someone Right to trade’53
Upon considering the several facts and reports set
out by domestic and international organizations, the Court held that it didn't consider any
alternative before issuing circular. Court also found that none of the entities under the
regulatory control of RBI i.e. Banks, NBFCs, etc. had suffered any harm or loss because of
50
2020 SCC Online SC 275
51
Supra note 18
52
Modern Dental College and Research Centre v. State of MP (2016) 7 SCC 353
53
See Md. Faruk v. the State of MP. In this case, Hon'ble Apex Court added another test in the doctrine of
Proportionality where the State has to show that "Right encroached under Article 19(1)(g) of the Constitution has
the nature of such an activity which is either inherently pernicious or can be harmful to the public at large."

trade in Virtual Currency.54
The court concluded by saying that the nature of RBI's 2018
Circular was more of a statutory direction that any legislation seeks to regulate and the RBI
doesn't have the power to legislate upon. Considering the above facts, Court struck down
RBI's 2018 notification.
After this Judgement by the Supreme Court, it's clear that Cryptocurrency is a form of currency
because of its nature and usage even though the current legislation doesn't consider it to be so.
As of now, there's neither any law/ regulation/circular, etc. by the State or any Public body nor
any regulator to facilitate the Cryptocurrency trade.
IV. THE TAXATION ASPECT
Indian taxation system has been divided into two sets- indirect taxes and direct taxes. A classic
example for a better understanding is when you pay your bill in a Restaurant, a part of the
expense includes taxes to the Government which is indirectly paid by you through the
Restaurant. That’ll be Indirect Tax. On the contrary, when you get your paychecks or an
income, Govt. takes a certain cut from your paycheck. That would be a direct tax. With regards
to Cryptocurrency, after the recent judgment by Supreme Court55
, certainly, Cryptocurrency is
a currency.
Irrespective of the judgment, the levy of taxes on Cryptocurrency can't be ruled out because
the Indian Income Tax laws have always sought to tax income received. Following are the two
scenarios which can help in understanding the possibility of taxation on Bitcoins:
SCENARIO A: BITCOIN MINING
Upon hearing the word ‘Cryptocurrency mining’ one may envisage coins being dug
from the ground. Well, unlike gold or ore mining, Cryptocurrency mining is done to
find out bitcoins. In theory, Cryptocurrencies are believed to be existing in the
protocol’s design (akin to gold’s presence underground) but they haven’t been brought
54
See State of Maharashtra v. Indian Hotel and Restaurants Association. In this Court, the Supreme Court
observed that "the State has to apply its mind with the help of various data before applying restrictions upon
Fundamental Right." In short, the Restrictions should be reasonable enough to restrain Fundamental Right.
55
Supra Note 50

in the market yet. This is where the role of Miners comes in56
. Cryptocurrency Miners
brings those unrooted bitcoins in a light that acts as self-generated capital assets and
selling of these assets brings in capital gains.
Section 55 of the Income Tax Act, 1961 defines the cost of acquisition of self-generated
assets. However, in B.C. Srinivasa Shetty57
Apex Court had held that “Capital gain can’t
be taxed for any cost of Acquisition, on sale of Assets which is acquired by way of
adverse possession.” Therefore, no taxation of capital gains on Cryptocurrency mining
under Sec. 55 of the IT Act.
According to one report, The Central Board of Indirect Taxes and Customs was mulling
over a proposal to the GST Council to include Cryptocurrency 'Mining’ under the ambit
of Goods and Services Tax because it incurs fees and generates rewards and from such
fees/rewards, taxes can be collected.58
That could have been the first step from the
Indian Government towards taxation of activities associated with Cryptocurrency.
SCENARIO B: CRYPTOCURRENCY AS AN INVESTMENT IN CRYPTO-
EXCHANGE
Appreciation of the value of cryptocurrency held as an investment upon being
transferred in exchange for fiat money can lead to a rise in capital gains of an investor.
Definition of business under Income Tax Act comprises of “trade, commerce or
manufacture or any adventure or concern of such nature.”59
. If any person is
continuously trading in Cryptocurrency and is earning capital gains out of such trade,
he is liable for the tax.60
It not necessary that gains must be in terms of money and even
such gain is accumulated in terms of crypto coins, it shall still be taxed. Further, any
56
How Bitcoin Mining Works; Available on https://www.coindesk.com/learn/bitcoin-101/how-bitcoin-mining-
works (Last visited May 19, 2020)
57
CIT v. B.C. Srinivasa Shetty (1981) 128 ITR 294 (SC). Also See Evans Fraser and Co. Ltd. v. CIT, 1981 SCC
OnLine Bom 365 : (1982) 137 ITR 493; Bawa Shiv Charan Singh v. CIT, 1984 SCC OnLine Del 4 : (1984) 149
ITR 29
58
Bitcoin & GST In India; Available on https://www.avalara.com/in/en/learn/press/bitcoin-and-gst-in-india.html
(Last visited May 19, 2020)
59
The Income Tax Act, 1961, Sec. 2(13)
60
The Income Tax Act, 1961, Sec. 28

purchase of a capital asset is liable to get tax deduction within the provision specified
in the Income Tax Act.61
Upon looking at the abovementioned scenarios, it's clear that even though there's a vacuum as
to the regulatory aspect of Cryptocurrency, it'll be wrong to say that activities associated with
it are not taxable.
V. HOW ARE OTHER COUNTRIES DEALING?
Cryptocurrency is not just limited to India. One of the Objectives of Cryptocurrency is to create
a virtual currency that can be accessed by anyone, anytime, and to create this world a single
marketplace.62
But this objective can only be achieved if governments around the world with
it to happen. Conflicting positions of the Governments have been seen around the world as to
some classifying Cryptocurrency as 'Commodity', some 'Currency', some 'Illegal', and rest
'Nothing' (like India). With this, Let’s have a look around some of the major economies around
the world and their approach:
AUSTRALIA:
Leading the way on taxation of Bitcoin, Australia is one of the active economies with regards
to Cryptocurrency and its potential impacts on the economy. Following a series of court rulings
relating to the application of tax laws to the Bitcoin, the Australian Tax Authority published
guidance concerning tax treatment of virtual currency.63
ATO considered the virtual currency
as “neither money nor a foreign currency”64
as it believed that transaction in Cryptocurrency
61
These provisions deal with expenditure allowed as a deduction under Sec.30- Sec.37(1) as well as specific
allowances and disallowances under the Income Tax Act, 1961.
62
How Blockchain Can Improve Globalization; Available at https://cointelegraph.com/news/how-blockchain-
can-improve-globalization (Last visited May 19, 2020)
63
Tax Treatment of Crypto-Currencies in Australia – Specifically Bitcoin, Australian Taxation Office (ATO),
https://www.ato.gov.au/General/Gen/Tax-treatment-of-crypto-currencies-in-Australia---specifically-bitcoin/.
Also See: ATO, Income Tax: Is Bitcoin a 'Foreign Currency' for Division 775 of the Income Tax Assessment Act
1997 (ITAA 1997)? (TD 2014/25), https://www.ato.gov.au/law/view/document?src=hs&pit=
99991231235958&arc=false&start=1&pageSize=10&total=7&num=3&docid=TXD/TD201425/NAT/ATO/000
01&dc=false&tm=and-basic-TD 2014/25 (Last visited May 19, 2020)
64
Supra Note 63

is “akin to a barter system”65
. The guidance further called cryptocurrency to be considered as
Capital gains for taxation purposes66
Further, with regards to business, the guidance suggested
that “any business that purchases items using bitcoin is entitled to a deduction based on the
arm’s length value of the item.”67
In August 2015, the Australian Parliament's Senate Economic
References Committee published a report upon bitcoin's potential impact on the economy.68
With regards to the applicability of Goods and Service Tax on transactions involving virtual
currency, The ATO published separate guidelines.69
In July 2017 Amendments were brought
to 'A New Tax System (Goods and Service Tax) Act 1999' whereby sale and purchase of digital
currency weren't made subject to Goods and Services Tax. These amendments were aimed at
removing "double taxations" of digital currency.70
Aiming against the potential misuse of Cryptocurrency in Anti-Terror/Money laundering
Activities, Australian Govt. introduced a bill in Parliament in 2017 which brought digital
currency exchange providers under the observation of Anti-Terror/Money laundering
Activities regulators.71
CHINA
Being aware of the development in Financial Technology, China has always been critical of
diluting its sovereign power. In December 2013, Chinese’ Central Bank, the Ministry of
Industry and Information Technology (MIIT), the State Administration for Industry and
Commerce (SAIC), the China Banking Regulatory Commission (CBRC), the China Securities
65
Supra Note 63
66
Supra Note 63
67
Supra note 63
68
Senate Economic References Committee, Digital Currency – Game Change or Bit Player (Aug. 2015),
https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Digital_currency/~/media/Com
mittees/economics_ctte/Digital_currency/report.pdf, (Last visited May 20, 2020)
69
GST and Digital Currency, ATO, https://www.ato.gov.au/business/gst/in-detail/your-industry/financial-
services-and-insurance/gst-and-digital-currency/, (Last visited May 20, 2020)
70
GST – Removing the Double Taxation of Digital Currency, ATO,https://www.ato.gov.au/General/New-
legislation/In-detail/Indirect-taxes/GST/GST---removing-the-double-taxation-of-digital-currency/, (Last visited
May 20, 2020)
71
Anti-Money Laundering and Counter-Terrorism Financing Amendment Bill 2017, Parliament of Australia,
https://www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=r5952),
archived at https://perma.cc/3LS8-TZ5L; Anti-Money Laundering and Counter-Terrorism Financing Amendment
Act 2017 (Cth) Sch 1 pt 2, https://www.legislation.gov.au/Details/C2017A00130, (Last visited May 20, 2020)

Regulatory Commission (CSRC), and the China Insurance Regulatory Commission (CIRC)
jointly issued a caution to the public at large against usage of bitcoins, its risks and challenged
its legality.72
Later, in September 2017, State again issued a statement cautioning
investors/buyers of virtual currency.73
In this statement, they referred to virtual currency as a
form of ‘public financing’ and referred to it as ‘currency’ which doesn’t have equal legal status
to the regular fiat currency. Vide such statement, China banned the circulation and usage of
virtual currency in its market.74
EUROPEAN UNION:
European Union has a significant past with regards to dealing with Cryptocurrency. European
Court of Justice (ECJ) in a landmark ruling75
held that the transactions related to exchanging
traditional currency for bitcoin or vice-versa constituted the supply for consideration, but it
shall be exempted under Value-Added-Tax (VAT). It led to the exemption of the imposition of
VAT on the trading of Cryptocurrency in EU Member states.
On July 5, 2016, a legislative directive was proposed by the European Commission to amend
the Fourth Anti-Money Laundering Directive which ought to bring Virtual Currency exchange
platforms within the scope of the directive.76
This was brought to ensure that these Virtual
Currency exchanges are a safe place to invest in and to check and prevent money laundering
or terror financing. The European Parliament gave its acceptance for the amendment in its
plenary session.77
72
PBOC, MIIT, CBRC, CSRC, and CIRC Notice on Precautions Against the Risks of Bitcoins (Dec. 3, 2013),
http://www.miit.gov.cn/n1146295/n1652858/n1652930/n3757016/c3762245/content.html (Last visited May 20,
2020)
73
PBOC, CAC, MIIT, SAIC, CBRC, CSRC, and CIRC Announcement on Preventing Financial Risks from Initial
Coin Offerings, http://www.pbc.gov.cn/goutongjiaoliu/113456/113469/3374222/index.html (in Chinese), (Last
visited May 20, 2020)
74
Id.
75
Case C-264/14, Skatteverket v. David Hedqvist, ECLI:EU:C:2015:718, http://curia.europa.eu/juris/celex.jsf?
celex=62014CJ0264&lang1=en&type=TXT&ancre (Last visited May 20, 2020)
76
Proposal for a Directive of the European Parliament and the Council Amending Directive (EU) 2015/849 on
the Prevention of the Use of the Financial System for Money Laundering or Terrorist Financing and Amending
Directive 2009/101/EC, COM (2016) 450 final, https://eur-lex.europa.eu/legal-
content/EN/TXT/PDF/?uri=CELEX:52016PC0450&from=EN. (Last visited May 20, 2020)
77
Press Release, European Parliament, Anti-money Laundering: MEPs Vote to Shed Light on the True Owners
of Companies (Apr. 19, 2018), http://www.europarl.europa.eu/news/en/press-room/20180411IPR01527/anti-
money-laundering-meps-vote-to-shed-light-on-the-true-owners-of-companies, Last visited May 20, 2020)

However, European Supervisory Authorities for securities (ESMA), banking (EBA), and
insurance and pensions (EIOPA) jointly issued a statement warning its customers against the
"highly risky and unregulated products" which was intentionally aimed at Virtual Currency.78
The same critique was soon followed by the President of the European Central Bank(ECB),
Mario Draghi, who warned against virtual currencies terming it to be a "very risky asset".79
Responding to such critiques, the European Commission presented an Action plan on the
acceptability of technology-driven innovation in Financial Technology like BlockChain,
Artificial Intelligence, etc.80
JAPAN
Japan is among the first developing countries which have regulated the cryptocurrency
exchange business in 2017 by bringing an amendment in the Payment Services Act. Through
this amendment, the definition of 'Cryptocurrency' was inserted whereby it was denied as
“property value that can be used as payment for the purchase or rental of goods or provision of
services” or “property value that can be mutually exchangeable and is transferable via an
electronic data processing system”.81
Under this act, the only business registered with the local Finance Bureau is allowed to operate
the Cryptocurrency Exchange.82
This act further requires the Cryptocurrency exchange
businesses to distinctively manage between fiat money and cryptocurrency. Furthermore, these
businesses shall be subject to review by certified public accountants or accounting firms83
and
78
European Supervisory Authorities, WARNING. ESMA, EBA, and EIOPA Warn Consumers on the Risks of
Virtual Currencies, https://www.eba.europa.eu/documents/10180/2139750/Joint+ESAs+
Warning+on+Virtual+Currencies.pdf,(Last visited May 20, 2020)
79
Mario Draghi, President of the ECB, Introductory Statement and Closing Remarks at the European Parliament
Plenary Debate on the ECB Annual Report for 2016, https://www.ecb.europa.eu/press/key/date/
2018/html/ecb.sp180205.en.html (Last visited May 20, 2020)
80
Communication From the Commission to the European Parliament, the Council, the European Central Bank,
the European Economic, and Social Committee and the Committee of the Regions. FinTech Action Plan: For a
More Competitive and Innovative European Financial Sector, COM (2018) 109 final, http://eur-
lex.europa.eu/resource.html?uri=cellar:6793c578-22e6-11e8-ac73 (Last visited May 20, 2020)
01aa75ed71a1.0001.02/DOC_1&format=PDF, archived at http://perma.cc/F7NP-YPCP. (Last visited May 20,
2020) Press Release, European Commission, European Commission Launches the EU Blockchain Observatory
and Forum, http://europa.eu/rapid/press-release_IP-18-521_en.htm, (Last visited May 20, 2020)
81
Art. 63-17. Payment Services Act
82
Id. arts. 63-2 & 63-3
83
Id. art. 63-11.

they must have designated dispute resolution centers to solve customer grievances.84
These
cryptocurrency exchanges have maintained account records of its customers like any other
stock trading facility and on any suspicion of illegal activity, they've to inform it to the
government85
What makes trading in cryptocurrency more peculiar in Japan is its taxation regime. Japan’s
National Tax Agency has classified profit earned by sales of cryptocurrency as ‘miscellaneous
income’86
and not ‘capital gain’87
RUSSIA
In January 2018, the Ministry of Finance published law on digital financial assets where
'mining' was defined as "activities aimed at the creation of cryptocurrency to receive
compensation in the form of cryptocurrency”.88
In the said draft, Crypto Coins are classified
as ‘Property’ and not ‘Currency’ and its exchange is allowed only through licensed operators.89
To protect rights of the owners of crypto coins and tokens, the draft provides for judicial
protection and these coins are to be included in a bankruptcy estate or a deceased person's
estate.90
84
Id. art. 63-12
85
Act on Prevention of Transfer of Criminal Proceeds, Act No. 22 of 2007, amended by Act No. 67 of 2017, art.
2 paras. 2, art. 4 & arts. 7–8.
86
Income Tax Act, Act No. 33 of 1965, amended by Act No. 74 of 2017, art. 35.
87
Id. art. 33.
88
Bill No. 419059-7, Federal Law of the Russian Federation on Digital Financial Assets, http://asozd2c.duma.
gov.ru/add work/scans.nsf/ID/E426461949B66ACC4325825600217475/$FILE/419059-7_20032018_419059-
7.PDF?OpenElement;(Last visited May 20, 2020)
89
Lyudmila Petukhova, Passion for Bitcoin: How Cryptocurrencies and ICO Will Be Regulated in Russia, RBC
https://www.rbc.ru/finances/20/03/2018/5ab125e69a79474518a5c2a1 (Last visited May 20, 2020)
90
Tatyana Zamakhina, Money in the Web, A Bill on Digital Economy Has Been Submitted to the State Duma,
RG.ru, https://rg.ru/2018/03/26/v-gosdumu-vnesen-zakonoproekt-o-cifrovom-prave.html?utm_
source=rg.ru&utm_medium=offline&utm_campaign=back_to_online. (Last visited May 21, 2020)

UNITED STATES
The United States has taken a positive stand towards accepting the virtual currency as an
alternate form of digital payment. Big businesses like Dish Network91
, Microsoft Store has
started accepting payments in Bitcoin.92
Virtual Currency has also gained a significant presence
in the US Derivatives market.93
Speaking of the regulatory framework, the U.S. Department of Treasury's Financial Crimes
Enforcement Network (USA FinCEN) has been issuing regulation concerning Bitcoins from
2013.94
The 2013 regulation came in the backdrop of cryptocurrency crime and money
laundering practices whereby the regulation expanded travel's rule coverage to the Crypto
Exchange.95
Unlike India, the USA has classified Bitcoin as Money Services Business (MSB) which is
regulated under the Bank Secrecy Act. Under this act, The Crypto-Exchanges are required to
adhere to certain responsibilities like reporting, registering, and record keeping.96
For taxation
purposes, Bitcoin is categorized as property by Internal Revenue Services.97
Businesses trading
in the Virtual Currency business are required to obtain a license from the New York
Department of Financial Services (NYSDS)98
91
Dish Newsroom. "DISH adds Bitcoin Cash as Option for Customers; Migrates to BitPay for Cryptocurrency
Payment Processing." Available on http://about.dish.com/2018-08-09-DISH-adds-Bitcoin-Cash-as-Option-for-
Customers-Migrates-to-BitPay-for-Cryptocurrency-Payment-Processing. (Last visited May 21, 2020)
92
NASDAQ. "7 Major Companies That Accept Cryptocurrency." Available on
https://www.nasdaq.com/articles/7-major-companies-that-accept-cryptocurrency-2018-01-31 (Last visited May
21, 2020)
93
Nasdaq. "How Traders Can Benefit From Bitcoin Derivatives With Continuous Settlement." Available on
https://www.nasdaq.com/articles/how-traders-can-benefit-from-bitcoin-derivatives-with-continuous-settlement-
2019-10-09 Accessed March 3, 2020. (Last visited May 21, 2020)
94
FinCEN, Application of FinCEN's Regulations to Persons Administering, Exchanging, or
Using Virtual Currencies, March 18, 2013, available at https://www.fincen.gov/resources/ statutes-
regulations/guidance/application-FinCEN's-regulations-persons-administering (Last visited May 21, 2020) (As
per this guidance, administrators of bitcoins are subjected to regulation as 'Money Services Business' (MSB) under
the Bank Secrecy Act).
95
See Also, the U.S. to strictly enforce anti-money laundering rules in cryptocurrencies: FinCEN chief; Available
on https://www.reuters.com/article/us-crypto-currencies-fincen/u-s-to-strictly-enforce-anti-money-laundering-
rules-in-cryptocurrencies-fincen-chief-idUSKBN1XP1YR (Last visited May 21, 2020)
96
Department of the Treasury Financial Crimes Enforcement Network. "Application of FinCEN’s Regulations to
Persons Administering, Exchanging, or Using Virtual Currencies," Page 1. (Last visited May 21, 2020)
97
Pete Rizzo, IRS to Tax Digital Currencies as Property, Not Currency, Coindesk
http://www.coindesk.com/internal-revenue-service-treat-digital-currencies-property/. (Last visited May 21, 2020)
98
Bit License Regulatory Framework, DEPART. OF FIN. SERVICES https://www.dfs.ny.gov/legal/re
gulations/bitlicense_reg_framework.htm. (Last visited May 21, 2020)

VI. CONCLUSION
With rapid developments in mobile and telecommunications technology and continuous
updates in the Financial Technology field, the Indian Government's support for virtual currency
business is minimal. No doubt, the government's incentivized support for digital payments has
led to tremendous innovation and growth of FinTech products but the same is not the case with
cryptocurrency. Even after Supreme Court striking down the RBI 2018 circular making a way
for crypto exchanges, it has been reported that the main reason behind such circular was to
protect the interest of investors in the absence of any law.99
And such fear is reasonable,
especially when there's a continuous increase in cryptocurrency-related crime.100
However,
banning crypto-currency is not an answer to curb the crime, but regulating is. By saying this, I
would also highlight statistics that prove that almost one-fifth of India's population remains
unbanked.101
Allowing facilities like virtual currency can help this section of the society in
accessing basic credit facilities and would provide an unparalleled solution. However, different
approaches taken by countries with regards to cryptocurrency may hamper its one of the
objectives of the world's single currency.102
As we have seen, major economies around the world have already started accepting
Cryptocurrency in one form or the other but India's scathing approach to this worldwide
development comes at a high cost. As we have seen several regulator's success103
in their
respective field, the Indian Government should consider appointing a regulator to regulate the
Cryptocurrency market. An increase in the rate of bitcoin traders every day, demands a
99
Why India’s central bank doesn’t trust cryptocurrencies; Available on https://qz.com/india/1326385/the-
reasons-why-rbi-doesnt-trust-cryptocurrencies/ (Last visited May 21, 2020)
100
India’s bitcoin boom is fueling a surge in cryptocurrency crime; Available on
https://qz.com/india/1299642/indias-bitcoin-boom-is-fueling-a-surge-in-cryptocurrency-crime/ (Last visited May
21, 2020)
101
EY-ASSOCHAM KNOWLEDGE REPORT, Evolving Landscape of Financial Institutions in India, July 2016,
available at http://www.ey.com/Publication/vwLUAssets/ey-evolving-landscape- of-microfinance-institutions-
in-india/$FILE/ey-evolving-landscape-of-microfinance-institutions-in-india.pdf
102
Bitcoin Will Be World’s ‘Single Currency’ Says Twitter CEO; Available on
https://www.coindesk.com/twitter-ceo-jack-dorsey-bitcoin-will-be-the-worlds-single-currency (Last visited May
21, 2020)
103
Sebi at 25: Why Sebi is an unusual example of public policy success in India Available on
https://economictimes.indiatimes.com/opinion/et-commentary/sebi-at-25-why-sebi-is-an-unusual-example-of-
public-policy-success-in-india/articleshow/20234939.cms (Last visited May 22, 2020)

balanced approach from the govt. by allowing a safe and secure platform for the investors and
traders as well as preventing illegal activities
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