Bitcoin is a virtual currency. The currency can be used as a an alternative of money, held as investment or trade.

Take example of following transactions:

Bitcoins held as Investment

Suppose you bought Bitcoins for 5,00,000 and are held as investment. You are currently in profit of 3,00,000.

Bitcoins held in trade

You sold few items online and accepted bitcoins, the coins are not converted to INR.

Speculation trading in Bitcoins

You traded bitcoins during the year and made profit of 5,00,000.

Income tax laws charge tax on all incomes except few. Even the income realised in form of Bitcoins will be taxed, but the question is under which head.

In USA, IRS have classified Bitcoins as capital asset instead of currency. RBI or government of India have not classified it either as commodity or currency.

Till the government clarifies the doubts, the confusion will remain regarding the taxation of bitcoins.

In the above scenerios, Bitcoins in trade will be taxed as business income. Once sale is made, the income is computed whether money is realised or not.

The confusion is regarding trading in bitcoins and holding bitcoins as investment.

If someone holds bitcoins for a year, and makes profit by selling them. How the income will be taxed?

Whether the income will be taxed as Gains on sale of Capital Assets, or under speculation business or income from other sources?

By analysing the current income tax laws, the best suitable head is Income from other sources and income from speculation activities.

The income can not be treated as Capital gain, since tax laws have not declared bitcoins as capital assets.

Posted 3 years ago by CA Pulkit Sharma

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