Virtual Currency (VC) or Crypto currency is an innovative concept which works as a medium of exchange for purchasing goods and services online. The working of cryptocurrency uses cryptography. For each cryptocurrency, a Distributed Ledger Technology (DLT) is used for keeping the database of all the transactions. This database is publicly used for storing information regarding financial transactions made through cryptocurrency. Technically, this list or the records are known as blocks which are connected with the help of cryptography and the same is known as Blockchain.

Blockchain is a system of recording information of transactions while ensuring Security, Transparency and Decentralization. This digital ledger of transaction is duplicated and distributed across the entire network of computer system on the blockchain.



Mining is an activity where an individual (called the “miner”) uses his computer prowess to crack computationally difficult puzzles. The process of cracking such puzzles which are integral to the blockchain technology, help in maintaining them. As a reward for this, the miner gets new bitcoins which is nothing but creation of a bitcoin or mining.


Everyone cannot be a Crypto miner. Hence, you can consider buying same from crypto exchanges and store them in an online wallet in digital form. Unicorn, Bitxoxo, Zebpay, Coinbase etc., are some of the bitcoin exchanges presently in India. Such bitcoins would be purchased in consideration for real currency. It would be interesting to note that currently, the value of 1 bitcoin is approximately about INR 3,61,610.


Though this may not be a common phenomenon in India currently, there are few savvy businessmen who accept bitcoins (instead of real currency) on sale of goods or services, they deal in.


Year : 2012

Cryptocurrency made its subtle entry in India in the year 2012 when small scale Bitcoin transactions had already started taking place across the country.

Year : 2013

In the year, 2013 Bitcoin began gaining some popularity within the country. The vintage era pizza shop known as Kolonial (Worli, Mumbai) became the first restaurant service in India to accept payments in Bitcoin. Gradually, after 2013, the rise in use of this parallel currency began.

Year: 2016

Finally, when demonetization took place in the year 2016, more investments in cryptocurrencies started so as to lower the uncertainties. People started buying large orders of Bitcoin and other cryptocurrencies, which they would sell at a later date. The other well-known types of cryptocurrency are Ether (ETH), Ripple (XRP) and Litecoin (LTC). Transactions pertaining to online shopping and investment in shares, started seeing the use of crypto currency in this year.

Year: 2017

There have been some apprehensions surrounding the use of cryptocurrencies ever since the Bitcoin crash in 2017. The crash in 2017 happened when the government sent out a warning against the use of the same and ruled out the possibility of fraud termed as ‘Ponzi schemes’. The government still holds the same viewpoint and may continue until and unless the crypto market gets regulated. There is another reason as well for the crypto crash in 2017. Because of the impact of China’s warning against investing in cryptocurrencies, the crypto market was hit badly. The People’s Bank of China went against the investment in virtual currencies and alerted its people against the negative impacts like money laundering, suspicion of market manipulation and so on. This condition improved by the end of the year due to certain reasons like Japan declaring Bitcoin as a legal currency in April 2017. Furthermore, the U.S regulator, CFTC (Commodities Futures Trading Commission) gave nod to cryptocurrency trading.

Year: 2018 to 2020

01. In the year 2018, In the budget speech of 2018-19, the Hon’ble Finance Minister announced that the government does not consider cryptocurrencies as legal tender. He stated as follows

112. Distributed ledger system or the blockchain technology allows the organisation of any chain of records or transactions without the need for intermediaries. The Government does not consider crypto-currencies legal tender or coin and will take all measures to eliminate use of these crypto assets in financing illegitimate activities or as part of the payment system. The Government will explore use of blockchain technology proactively for ushering in digital economy.”

Consequently, The RBI banned crypto transactions after a string of frauds post demonetization were uncovered.

02. Since the first Bitcoin ATM came into being after the RBI’s ban on cryptocurrencies, the one installed in Bengaluru was immediately seized.

03. Subsequent to the ban, The Hon’ble Supreme Court of India in the case of Internet and Mobile Association of India vs. Reserve Bank of India in its Order dated 04.03.2020 struck down RBI’s curve on Cryptocurrency trade in India. This verdict gives a thumbs up to the Crypto exchanges as well as Crypto as an asset class, as indirectly they have not been found violating any other law of the land. So except for RBI Ruling it in a way tells us that everything else was legit and it upholds the right of the investors who have invested in Cryptos. The win in the court prompted an almost 450 percent surge in trading according to TechSci Research, reviving concerns as more Indians risked savings amid job losses and economic slowdown worsened by Covid Pandemic. Bitcoin marketplace Paxful reported 883 percent growth between January to May 2020 from around $ 2.2 million to $ 22.1 million. WazirX, a Mumbai based crypto exchanger grew 400% in March, 2020 and 270% in April, 2020 on month-on-month basis, according to TechSci Research.


The rules and regulations for cryptocurrencies are not established yet, and this lack of the regulatory setup deprives the investors of the safety from several kinds of risks, which includes Potential losses for the retail investors, owing to Volatility of crypto trade and misuse of technology, leading to funding of harmful or dangerous organizations indulging in terrorism, trafficking, etc.

This unregulated cryptocurrency market is unlike the financial institutions and the markets, where as of now third-party audits, financial reporting & disclosure and regulations of crypto trade is not possible.

Since the Supreme Court has lifted the ban on the use of cryptocurrencies, it is essential that the use of these currencies comes under the ambit of a regulatory framework. According to the Bloomberg report dated 20th March, 2020, India is already planning to regulate the cryptocurrencies.


With the Supreme Court’s order recently about lifting the ban imposed, there seems to be a bright future for the crypto market. This ruling supports the trading of cryptocurrencies like Bitcoin and Ethereum. Still, the full-fledged use of the crypto trading may take some time as RBI’s formal notification is awaited.

According to The New Indian Express, looking at the data with regard to the value of Bitcoin in the past one year, it rose from ₹ 2.7 lakh in March 2019 to ₹ 8.46 lakh in July 2019. But, in December 2019, it again fell to ₹ 4.69 lakh. Coming to the judgement of the Supreme Court recently, of lifting the ban RBI had imposed, the value of Bitcoin went up to ₹ 6.74 lakh in March 2020.


All the Digital currency or Financial Technology firms are working towards reviving their plans of expanding businesses in India due to the return of crypto. According to the Economic Times, Singapore-based crypto firm ZPX will consider ramping up operations. Nischal Shetty, the co-founder of the crypto exchange WazirX, added that investment in Indian markets will begin this year.


The concept of Crypto Currency being quite new to the Indian market, apparently the government has not yet brought taxability of Crypto into the statute books. At the same time, the levy of tax on such Crypto cannot be ruled out because the Income Tax Act, 1961 has always sought to tax income received irrespective of the form in which it is received.

Therefore, the possibility of tax on Crypto can be looked at under the following situations:

1. When Crypto is generated through Mining

2. When Crypto held as an investment is subsequently sold.

3. When Crypto held as stock in trade is subsequently sold.

4. When Crypto is received as a consideration against sale of goods or services.


Crypto Generated by mining are treated as self-generated capital assets. Subsequently sale of such crypto would, in the ordinary course, give rise to capital gains. However, one may note that the cost of acquisition of a crypto currency cannot be determined as it is a self-generated asset. Furthermore, it does not fall under the provisions of Section 55 of the Income-tax Act, 1961 which specifically defines the cost of acquisition of certain self-generated assets.

Therefore, the capital gains computation mechanism fails following the Supreme Court decision in the case of B.C. Srinivasa Shetty. Hence, no capital gains tax would arise on the mining of bitcoins. This position would hold till such time the government thinks of coming up with an amendment to Section 55 of the Act.

Due to the above, currently, The Income Tax Authorities strive hard to Tax Crypto currency under the head – Income from Other Sources. Source of Acquisition of such Cryptos Need to be explained by the assessee in crystal clear manner to avoid adverse inference and action by the department.

There is another school of thought which seeks to tax the Crypto at the point of generation itself i.e. at the point when the crypto was mined at the Fair Market Value at that point in time. But the biggest challenge in such a scenario is tracking of the Mining Event. Hence urgent requirement in modification of law is required to envisage such situations and track and monitor them for taxation purpose.


If cryptos being capital assets, have been held as an investment and are transferred in exchange for real currency, the appreciation in value would give rise to a long term capital gain or a short term capital gain depending on the period of holding of the bitcoin. Further, long term gains would be taxed at a flat rate of 20% while short term gains would be taxed at the individual slab rate. The cost of acquisition for arriving at long term capital gains will be determined after giving the benefit of indexation. Again, Department has in certain cases Tried to tax Such Transactions under the head Income from Other Sources and Denied the Benefit of Indexation as well as lower tax rate which would have been available if the said Investment were treated as a Long term capital Assets. Even in this case, Source of Acquisition of such Crypto Needs to be explained by the assessee in crystal clear manner to avoid adverse inference by the department.


The income arising out of cryptos trading activity would give rise to income from business and accordingly, the profits arising out of such business would be subject to tax as per the individual slab rates. An alternate view also arises that If Cryptos are traded as a commodity deriving its value based on future Demand and Supply they should be taxed as speculation Income.


Cryptos being received as consideration in such a scenario shall be treated on par with receipt of money. It would constitute income in the hands of the recipient. Further, since the recipient received this income out of a business or profession, he would be taxed, normally, under the head profits or gains from business or profession at the fair Market value of Such Crypto.

As regards the disclosure requirement of Cryptos in the income tax return forms, there continues to be a lack of clarity.


In my opinion, Virtual Currency (VC) / Cryptos will fast become part of the new normal with digitization of the market catching up fast in India. The Regulatory authorities should move quickly to lay down the groundwork for a clear Law on Taxation of Such Virtual Currency and guidelines Regulating transactions of such VCs and monitoring said Transactions. The Law Should clearly envisage each situation and seek to tax it in a Justl and reasonable manner. Furthermore, The government through the RBI should come up with its own currency as an alternative to other VCs in the market to enable a smooth transactions and build trust in the stakeholders.

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