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Cryptocurrencies—Legal and Tax Considerations in India
BY BIJAL AJINKYA, RAGHAV KUMAR BAJAJ AND
MILIND HASRAJANI
With a global market capitalization of around $2 tril-
lion, cryptocurrencies (or virtual currencies—the ex-
pression in use recently for such assets) can no longer
be ignored. The hunger for alternative investment op-
portunities fueled by pandemic-hit business sentiment
has been a prominent reason for the astounding jump
in crypto valuations in the past 12 months.
From a global tax perspective, this provides a mas-
sive tax opportunity for countries, and governments as
well as international economic bodies have become
more active and pragmatic in their approach towards
cryptocurrencies. Though there are several macro-level
policy issues and aspects—legal, regulatory, and
taxation—that require clarity in this area, the underly-
ing technology (i.e. the blockchain technology) needs to
be leveraged and explored proactively to usher in the
transition towards a digital economy.
India’s approach towards cryptocurrencies has been
cautious and conservative, but it has certainly evolved
over time. From a tax perspective, there is no official
guidance from the Indian government yet on how
crypto-related gains should be taxed and what should
be the most appropriate characterization for cryptocur-
rencies. The taxation of crypto-related gains will there-
fore need to be examined in light of the existing taxa-
tion principles.
In this article we discuss some of the key technologi-
cal concepts that surround cryptocurrencies and the
Bijal Ajinkya is a Partner, Raghav Kumar
Bajaj is a Principal Associate and Milind Has-
rajani is an Associate at Khaitan & Co.
COPYRIGHT R 2021 BY THE BUREAU OF NATIONAL AFFAIRS, INC.
evolving legal landscape as well as the income tax re-
lated implications related to cryptocurrencies in India.
Technological Aspects of
Cryptocurrencies
Cryptocurrencies are usually defined as a digital rep-
resentation of value which is secured using crypto-
graphic methods and is recorded, transferred, or stored
electronically using distributed ledger technology. Sim-
ply put, these are electronic peer-to-peer currencies.
This concept gained traction after the 2007–08 global
financial crisis, with the introduction of a cryptocur-
rency named Bitcoin.
The core ideology behind cryptocurrencies was to
create and move money without a central authority (i.e.
a central bank of a country). Hence it was necessary to
ensure that the underlying technology and infrastruc-
ture on which a cryptocurrency is based has an in-built
trust mechanism and that the data/information entered
on such networks remains immutable and tamper-
proof.
In this regard, we outline below some of the key tech-
nological aspects:
s Distributed Ledger Technology (DLT): a distrib-
uted network of participants, using independent com-
puters (also called nodes) which record, share, and syn-
chronize information (essentially transactions or data)
independently in their respective electronic ledgers. For
ease of understanding, as an analogy, DLT can be un-
derstood as a WhatsApp group chat where the chat his-
tory (which contains the information) is the ledger
which is distributed on every member’s phone (node/
participant).
2
s Cryptography: the method of sending secured in-
formation between two or more participants. It essen-
tially involves converting information that is available
in plain ordinary text into unintelligible text (encryp-
tion) and vice versa (decryption). Cryptography in the
realm of cryptocurrencies is used to secure and authen-
ticate the information being recorded on a DLT. As the
idea behind cryptocurrencies is to eliminate the need
for a central authority, cryptographic methods are used
to secure and authenticate the information relating to
such cryptocurrency, to instil trust between the partici-
pants transacting in a cryptocurrency.
s Blockchain: A blockchain is a subset of DLT and
one of the most commonly used forms of DLT. As the
name suggests, it is essentially a chain of blocks with
each block linked to the previous one. Each block con-
sists of information on the transactions (timestamp,
value, etc.) that have taken place on the blockchain
DLT and which has been cryptographically authenti-
cated by the participants on the DLT. According to the
World Economic Forum, blockchain technology is be-
ing hailed as one of the seven revolutionary technolo-
gies that will revolutionize various aspects of human
lives.
s Mining: As explained above, information related
to transactions in a cryptocurrency is required to be au-
thenticated using cryptographic methods before it is
stored on a DLT. Thus, mining is deploying computers
to cryptographically authenticate such information be-
ing recorded on a DLT. However, not every participant
on the DLT may be interested in authenticating infor-
mation and may merely be interested in transacting
with the cryptocurrency. Therefore, to incentivize par-
ticipants to authenticate such information, a reward in
the form of the cryptocurrency itself is given to such
participants. Participants who successfully authenticate
such information using cryptographic methods are
called ‘‘miners.’’
Evolving Legal Landscape in India
Since Bitcoin and the concept of cryptocurrencies
started gaining traction, the Indian government has
consistently taken a cautionary approach, with the Re-
serve Bank of India (RBI) warning the Indian public
about the uncertainties surrounding cryptocurrencies.
In 2018, the RBI issued a prohibition on Indian banks
facilitating any transactions in cryptocurrencies. Fur-
ther, in 2019 an Inter-Ministerial Committee set up by
the Indian government also recommended that all pri-
vate cryptocurrencies, except any official digital cur-
rency issued by the state, be banned in India.
However, the legal landscape and the perception in
India of cryptocurrencies has evolved, and the RBI pro-
hibition described above was set aside by the Supreme
Court of India in 2020. Arguably, this was a watershed
moment in India’s cryptocurrency ecosystem. However,
the statements made by the government and regulators
from time to time still indicate that the future of crypto-
currencies from an Indian regulatory perspective may
be uncertain.
COPYRIGHT R 2021 BY THE BUREAU OF NATIONAL AFFAIRS, INC.
Key Taxable Events
The foundational step for imposing any tax on cryp-
tocurrencies is their characterization. It remains open
whether cryptocurrency should fall under the definition
of a ‘‘currency’’ or whether it should simply be classi-
fied as an ‘‘intangible asset.’’ This question has become
even more interesting recently as El Salvador has rec-
ognized Bitcoin as its legal tender and therefore it may
be argued that Bitcoin falls under the definition of a
‘‘foreign currency.’’
The taxable events in relation to cryptocurrencies can
be broadly divided into two categories—events which
lead to the creation or generation of a cryptocurrency,
and events which relate to the secondary disposal of a
cryptocurrency. The possible Indian income tax impli-
cations of such events are discussed below.
Creation of Cryptocurrencies
s Mining: If the activity of mining is carried out with
the intention of earning profits (i.e. as a business), then
the rewarded cryptocurrency should be taxable as busi-
ness income. However, if mining is carried out as a ca-
sual activity or a hobby, it needs to be evaluated
whether the rewarded cryptocurrency will be character-
ized as ordinary income or as a non-taxable capital re-
ceipt. For it to be characterized as ordinary income, the
relevant test will be whether cryptocurrency falls within
the ambit of a ‘‘security.’’ This is because under Indian
income tax law, receipt of a ‘‘security’’ for nil or inad-
equate consideration triggers a taxable event for the re-
cipient.
s Initial Coin Offering (ICO): Similar to an initial
public offering by a company, an ICO refers to an event
where a new cryptocurrency is issued in exchange for
one of the existing major cryptocurrencies (for ex-
ample, Bitcoin, Ether) or in some cases even in ex-
change for fiat currencies. An ICO is a commonly used
method for raising funds for a new project in the cryp-
tocurrency space. In the absence of any specific taxing
provision for such events in relation to cryptocurren-
cies, it seems that the existing provisions of Indian in-
come tax law relating to primary issuance of shares will
not be attracted in the case of an ICO.
s Airdrop: This refers to an event where cryptocur-
rency is given or distributed, without any consideration,
to a select few people (such as influencers, celebrities,
or other public figures) to increase awareness of the
cryptocurrency. This method is generally adopted by
new cryptocurrencies upon their launch in the market.
A recent example of airdropping occurred when more
than 50% of the Shiba Inu (a relatively new cryptocur-
rency launched in 2020) in circulation was donated to
Vitalik Buterin, the co-founder of Ethereum. In the case
of influencers and celebrities, the receipt of cryptocur-
rencies via an airdrop is likely to be taxable in the same
manner as fees received for promoting brand aware-
ness, i.e. as business income. However, in the case of
public figures (such as Buterin), who are not in the busi-
ness of carrying out brand awareness or marketing ac-
tivities, and to whom cryptocurrencies are airdropped
without any expectation of service in return, the receipt
may be taxable as an ordinary income, provided that
the cryptocurrency falls within the ambit of a ‘‘secu-
rity.’’

Secondary Disposal of Cryptocurrencies
s Mined coins: Where the secondary sale relates to
mined cryptocurrencies, the gains arising upon disposal
of such mined coins should be taxable as business in-
come, if mining activities were carried out with the in-
tention of earning profits. In any other case of a mined
coin, the gains arising upon disposal of mined coins
should be taxable as capital gains. However, it may be
argued that no capital gains tax should be levied in the
case of mined coins, as the cost of acquisition of such
assets is not determinable, thereby resulting in failure
of the machinery provisions for computing capital
gains. However, the tax authorities may want to argue
that the computing costs, electricity costs, etc., incurred
in relation to cryptocurrency mining should form the
cost base for computing such capital gains.
s Other than mined coins: In other cases, it needs to
be evaluated whether the gains arising from such sec-
ondary disposal would be taxable as business income or
capital gains, as may be applicable according to the
facts of the case.
s Exchange for goods/services: Where cryptocur-
rency was held for a period of time, during which its
value increased/decreased, and thereafter it was ex-
changed in return for any goods or services, the gains
earned or the losses incurred during the holding period
(i.e. the increase or decrease in the value of the crypto-
currency since its acquisition) before the cryptocur-
rency was exchanged for goods or service will result in
a taxable event. The tax implications in relation to such
gains should be the same as in case of a secondary dis-
posal, as discussed above.
Other Tax Considerations
Equalization Levy The Indian income tax law im-
poses an additional tax of 2%, the equalization levy
(EL), on the consideration received by an offshore en-
tity which manages, operates, or owns an electronic fa-
cility or platform, for online sale of goods or online pro-
vision of services or both.
Thus, for offshore cryptocurrency exchanges provid-
ing cryptocurrency-related services to Indian residents
or to any person using services from an Indian IP ad-
dress, the possible application of the EL should be
evaluated.
Similarly, the application of the EL in the case of an
offshore entity providing online wallet services for cryp-
tocurrencies should also be evaluated.
Tax Deducted at Source (TDS) Under the Indian in-
come tax law, if sale of goods by an Indian resident is
facilitated through an electronic facility or a platform
owned, operated, or managed by an entity (whether off-
shore or onshore), TDS at the rate of 1% needs to be de-
ducted by such entity. Thus, cryptocurrency exchanges
will need to evaluate the applicability of this provision
to their business models for facilitating the sale of cryp-
tocurrencies held by an Indian resident.
However, as the term ‘‘goods’’ is not defined under
Indian income tax law, it is necessary to evaluate on a
case-by-case basis (depending upon the sale of crypto-
COPYRIGHT R 2021 BY THE BUREAU OF NATIONAL AFFAIRS, INC.
3
currency being facilitated by the exchange) whether
cryptocurrencies will fall under the definition of
‘‘goods.’’
It is relevant to note that the definition of ‘‘goods’’ un-
der the Indian Sale of Goods Act has wide import and
includes movable property of every kind which is sold
for monetary consideration.
Global Tax Considerations and
Implications
The Organization for Economic Cooperation and De-
velopment (OECD) in its report titled ‘‘Taxing Virtual
Currencies: An Overview of Tax Treatments And
Emerging Tax Policy Issues’’ has noted that countries
have different approaches in their characterization of
cryptocurrencies for tax purposes.
While many countries have characterized cryptocur-
rencies as merely an intangible asset, some have gone
further and classified them as a financial instrument or
a virtual commodity. Certain countries such as Italy,
Belgium, and Poland have also classified them as ‘‘cur-
rency.’’
While a majority of countries is yet to formulate spe-
cific laws and regulations to govern the cryptocurrency
space, some, like the U.S., U.K., and Singapore, have
released detailed guidance in relation to the income tax
treatment of cryptocurrencies. The approach taken by
the U.S. and the U.K. is to treat mining as the first event
of taxation; whereas in Singapore, mere mining of cryp-
tocurrencies will not lead to any tax implications, and it
is only upon secondary disposal that tax implications
arise.
Another notable difference is that while Singapore
has provided clear implications in the case of different
types of ICOs, the U.S. and the U.K. have not provided
any guidance in relation to the tax implications in case
of an ICO. The U.K. has provided further guidance with
respect to determination of the situs of the cryptocur-
rencies as well for tax purposes.
Going Forward
The Indian government has on various occasions
clarified that cryptocurrency-related gains will be tax-
able depending upon the nature of the holding of such
cryptocurrency. A clear road map and official guidance
are keenly awaited on critical aspects such as what
should be the first taxable event and the valuation
mechanism, and who should have the obligation to re-
port cryptocurrency trades.
In recent years, the Indian income tax authorities
have also issued notices to cryptocurrency holders and
exchanges seeking details about their cryptocurrency
dealings.
It thus remains to be seen how the Indian govern-
ment develops regulations in the crypto space. If regu-
lated properly, this asset class could reap huge tax rev-
enues for the government which could be used to meet
its planned objectives in relation to the development of
the country.
Further, with talk gaining momentum that the Indian
government is considering a phased introduction of a
Central Bank Digital Currency, it will be imperative to
embrace the underlying blockchain technology.
4
The environmental impact of cryptocurrency mining
will also need to be weighed by governments when de-
ciding their next course of action in this field—for in-
stance, it has been reported that the electricity con-
sumed in mining Bitcoins represented about 0.59% of
global electricity consumption, and in May 2021, the
Iranian government imposed a four-month long ban on
cryptocurrency mining operations amid major power
blackouts in many cities.
The views of the author(s) in this article are personal
and do not constitute legal/professional advice of Khai-
COPYRIGHT R 2021 BY THE BUREAU OF NATIONAL AFFAIRS, INC.
tan & Co. For any further queries, please contact us at
ergo@khaitanco.com.
This column does not necessarily reflect the opinion
of The Bureau of National Affairs, Inc. or its owners.
Bijal Ajinkya is a Partner, Raghav Kumar Bajaj is a
Principal Associate and Milind Hasrajani is an Associ-
ate at Khaitan & Co.
The authors may be contacted at: bijal.ajinkya@
khaitanco.com; raghav.bajaj@khaitanco.com;
milind.hasrajani@khaitanco.com