As bitcoins and other cryptocurrencies begin to catch the fancy of Indian investors, the regulatory and tax treatment for such investments remain a grey area.

The Reserve Bank of India (RBI) on December 5 once again cautioned “users, holders and traders of Virtual Currencies (VCs) including bitcoins regarding the potential economic, financial, operational, legal, customer protection and security related risks associated in dealing with such virtual currencies.”

Clarity in Budget

It was the third such warning since 2013 and it clearly said that it has not given any regulatory approval for such currencies. More clarity is expected once the Finance Ministry finalises its opinion on a report on virtual currencies that was submitted to it recently.

It is expected that Finance Minister Arun Jaitley will make a mention of it in the forthcoming Budget.

However, bitcoin prices have already crossed $14,000 and are expected to rise further and government concerns have not dissuaded investors in the country.

Asset class

Many investors are just exploring the investment opportunity, while others have bought with small sums to just enjoy the thrill of the bull run.

“There is always some skepticism about a new investment asset, as was the case with mutual funds and even equities. But cryptocurrencies have proven to be uncorrelated with other asset classes,” said Gawrav Mehta, Co-Founder of the National Digital Asset Exchange and a full-time research scholar on cryptocurrencies.

Others, however, point out that since cryptocurrencies are not regulated and recognised in India, filing profits and losses from these can be difficult in income tax returns.

Amit Maheshwari, Partner, Ashok Maheshwary & Associates LLP, said, “Cryptocurrencies are a new asset class and are not regulated in India. Bitcoin being a foreign currency asset and the fact that there is no permission from the RBI to invest in it, may be treated as a violation of our foreign exchange regulations.”

He further pointed out that any losses arising due to bitcoin trade may be denied by the tax authorities and may invite questions from the Reserve Bank of India.

“Profits from bitcoins may be shown as income from other sources in tax returns. However, if considered an investment, they should attract short-term and long-term capital gains tax,” said another expert who did not wish to be named, pointing out that it can still lead to a lot of questioning by tax authorities.

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