Bitcoins or cryptocurrencies are new buzzwords both for investors and tax authorities. While investors are fascinated by an exponential increase in its valuation over the past few years and find it as an alternative investment vehicle for multiplying their investments, profits from investments made in Bitcoins have attracted the attention of tax authorities in India.

What is a Bitcoin?

Bitcoin is a cryptocurrency and a worldwide payment system not regulated by central banks. It is traded in Bitcoin exchanges across the world and bought and sold in exchange for real currencies. Bitcoins are also used as payment consideration/ payment method for purchase and sale of goods and services.

Legal status of bitcoins in India

Bitcoin, as a medium of payment, has neither been authorised nor regulated in India. Recently, Reserve Bank of India had also issued its advisory against use of or investing in Bitcoins and other cryptocurrencies. Since no legal status is granted to such virtual currencies, no set rules, regulations or guidelines have been laid down for resolving disputes that could arise while dealing with Bitcoins. Hence, such transactions come with their own set of risks. However, so far, there has been no blanket ban on Bitcoins in India.

Suspicion of illegal money

At the same time, since there are no regulations/ reporting mechanisms governing investment and trading in Bitcoins, the Indian tax authorities may suspect use of illegal money/ tax evasion in investments and trading in Bitcoins. During the last few days, the income tax authorities have conducted surveys at major Bitcoin exchanges across the country on suspicion of alleged tax evasion. Based on information collected from such surveys, the income tax department is also in the process of sending notices to high net-worth individuals (HNIs) across the country who were trading on the exchanges in Bitcoins.