The bitcoin surge in the current fiscal year (FY18) in the absence of regulation has rattled the government, prompting it to take a look at the policy and taxability of earnings from cryptocurrency trading.

The government will soon form a committee to look into all issues related to bitcoin trading and issue suitable clarification, Business Standard has learnt. This committee may be led by a senior finance ministry official and will include representatives of the Reserve Bank of India, IT ministry, and other central government departments.

This would be a second panel on the subject of cryptocurrencies. A committee was set up in April, and was headed by the special secretary in the department of economic affairs, to examine the international framework on virtual currencies and suggest measures on consumer protection and prevent money laundering.

“Bitcoin taxation is a grey area at the moment. We are yet to look into it in detail. A panel may examine each issue. There are no guidelines at the moment. A clarification may come,” said a senior government official.

Bitcoin, the first decentralised digital currency, has surged by over 1,200 per cent in value in the current year and is expected to soar in coming months as it gains popularity. The outstanding returns from bitcoin also raise tax evasion concerns.

Although the government is yet to clarify the matter, officials point out that the capital gains tax may arise on sales of

A senior tax official said that it was important to declare income from bitcoin sale in the returns filed for the fiscal year to avoid penal consequences. “One must file returns on income earned from bitcoin trading and pay the short-term capital gains tax of 30 per cent,” he said.

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The short-term capital gains tax of 30 per cent is likely to be levied if bitcoin is held for less than three years and 20 per cent if held for more than 36 months.

Another official warned that not declaring earnings from bitcoin in return filing could attract penalty and interest. A penalty of 50-200 per cent could be levied during the assessment, under underreporting, or misreporting income. Besides, an interest of 12 per annum could also be imposed.

A third source added that while there was currently a lack of clarity on in what manner the nationwide goods and service tax (GST) would apply for goods and services purchased through bitcoin, this matter was also up for discussion in North Block.

The person acknowledged that the Centre would have to take a firm stand on how to monitor the digital currency, whose user base was expanding rapidly in India.

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The Reserve Bank of India (RBI) joins the ranks of other global central banks that officially don’t recognise cryptocurrencies, but have not banned them. According to people familiar with RBI thinking, the central bank is not going to be one of the first central banks to embrace this technology, given the RBI’s conservative approach. India’s central bank did not encourage banks to invest and trade in credit default swaps before the global credit meltdown and this time too, it is not going to lend any official credence to the virtual currency movement. Since 2013, the RBI has issued three stern statements, warning the public about the dangers of cryptocurrencies such as bitcoin and have made it clear that the investors won’t get its protection if things blow up in their face.

A source familiar with the RBI’s thinking said the central bank was highly concerned about the use of cryptocurrencies in the dark web, or the Internet that cannot be accessed easily by the general public and where law enforcement agencies could not reach, given the Net’s secretive nature. The RBI is also looking at clarifications from the government before banning the currency or partially regularising it, but the government has not got back to the central bank on tax implications, jurisdictions, etc, said the source, adding the government probably did not want to look archaic by banning an emerging technology in global finance.

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There are also fears in the government that encouraging bitcoin use will undermine the usage of the domestic currency. The central bank is said to be of the opinion that trading in bitcoin would lead to a speculation on the rupee. It can create an artificial demand for the rupee, thereby leading to currency fluctuations.

The official in the tax department clarified that irrespective of the legal status of bitcoin, tax would need to be paid. However, the government is in a tizzy over being unable to track bitcoin owners since it is a crypted currency. “We won’t be able to find out about bitcoin holdings till a person sells those and gets the money in his bank account. It is only then that we could do a crackdown,” he said.

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The government should issue a clarification on bitcoin policy, said Rohinton Sidhwa of Deloitte. “While a clarification is required, the general principle suggests that bitcoin could be treated as any other capital asset. If you are holding it as an investment, the long-term or short-term capital gains tax would apply. In case you are a dealer, it will be taxed as business income,” he added.