India: Tax Officials Collecting Data on Bitcoin Investors

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By Siri Bulusu

Indian tax authorities will use investor data acquired from domestic Bitcoin exchanges to investigate whether individuals are evading tax by funneling money through the unregulated virtual currency market, according to an official.

Tax officials are investigating whether individuals are hiding income or “getting away with not paying taxes” on large amounts of money being invested into Bitcoin exchanges, the tax official told Bloomberg Tax Dec. 14, on condition of anonymity. India is one of several countries grappling with how to regulate the cryptocurrency market.

Bitcoin, a peer-to-peer digital currency, is not backed by any central bank or government and is distributed worldwide through an online ledger system called Blockchain which ensures the authenticity of transactions.

Because the system remains unregulated and its potential is still unknown, the Indian government is concerned that some taxpayers may have converted large amounts of cash into Bitcoin following demonetization, a national effort to crack down on tax evasion.

Gathering Investor Data

Indian tax officials are conducting “surveys” at Bitcoin exchange companies and requesting data on Bitcoin investors to ascertain identities, the frequency of transactions, the purpose of investments, and the treatment of gains earned, the official told Bloomberg Tax. The data will be analyzed to determine whether additional regulations or clarifications are required to ensure taxpayers are reporting income and paying taxes accordingly.

Bitcoin earnings should be treated in a similar manner to shares, the official said, though the nature of investment will need to be evaluated to determine if the income is taxed as capital gains or business income.

Apply 2007 Guidance?

Indian tax authorities issued guidance in 2007 on how to determine whether gains earned from shares were taxable as capital gains or business income—practitioners say those guidelines should be applied to Bitcoin earnings to “play it safe.”

“The basic principle of income tax is that you pay tax on any income regardless of its source unless there is a specific exemption deemed by provision of the law—I’m pretty sure people investing in Bitcoin know that any gain will be taxable,” Chetan Daga, senior partner at SKP Business Consulting LLP, told Bloomberg Tax Dec. 14.

There is no pressing need for the government to pass any new clarifications or regulations since the 2007 circular lays down the broad principles of how to identify if the Bitcoin investment is business or investment activity, Daga said. He noted that there has been no official mention yet of cryptocurrencies by Indian tax authorities.

Reserve Bank Caution

The Reserve Bank of India, however, issued a press release Dec. 5 “cautioning” investors, for the second time, of potential economic and legal risks associated with the unregulated market. The bank reiterated that India’s government had not yet given any license or authorization to Bitcoin operations.

“Guidance can sometimes be good and sometimes bad—as of now, there is a generic rule on taxing gains from investment shares that can be applied,” Rohinton Sidhwa, tax partner at Deloitte Haskins & Sells LLP told Bloomberg Tax Dec. 14 , adding that new laws are not necessary every time a new type of transaction is created

The tax department is merely “sniffing around” for signs of money laundering and tax evasion due to the large amount of attention the cryptocurrency has gained in recent weeks, Sidhwa said, but was skeptical of cryptocurrencies becoming very popular investments in India.

To contact the reporter on this story: Siri Bulusu in New Delhi at correspondents@bloomberglaw.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bloombergtax.com

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