Although, people around the world are actively investing in bitcoin and other crypto currencies for quite a while now, the burgeoning popularity and investment in such crypto currencies by people in India in recent past has captured the attention of the government of its possible impact on the Indian economy, tax evasion and money laundering.

Reserve Bank of India vide its press release has cautioned people about the potential economic, financial, operational, legal, customer protection and security-related risks associated with dealing in virtual currency. Furthermore, Income tax department in India has also surveyed bitcoin exchanges in India and is also in the process of issuing notices to around 5 lakhs individuals and entities dealing in bitcoins in India.

Though, there is no formal guidance from the tax department on the taxability of the gains accrued to the investors from the bitcoins and other crypto currencies, in terms of the provisions of the Income Tax Act in India, investment in crypto should be considered as capital asset and any gain arising from transacting in crypto currencies should be considered as a capital gain.

However, one important aspect which needs consideration and clarification from the tax department is whether investment in such virtual currencies would be considered as a ‘foreign asset’, and whether the same should be reportable and disclosed under Schedule FA (Foreign assets) of the Income tax returns. This clarity is important as non-reporting of a ‘foreign asset’ entails a penalty of Rs. 10 Lakhs and non-reporting of any foreign income would attract high taxes, penalty and prosecution under the draconian Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.

There are numerous wallets, exchanges and applications which are available for trade in bitcoins and other crypto currencies, some being hosted in India and others outside India. In our view, having investment in bitcoins and other virtual currencies through wallets in India or storing them offline on hardware, would not qualify the same as ‘foreign assets’ and thus would not attract the rigorous provisions of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. However, a taxpayer who has placed the value of his or her bitcoin in a virtual wallet hosted overseas should include Bitcoin for purposes of reporting of ‘foreign assets’, to avoid the rigours of the draconian Black Money Act.