Meaning – Bitcoin mining process
Bitcoin mining refers to the process whereby verified bitcoin transaction records are added to a blockchain. Bitcoin miners validate all transactions involving Bitcoins and thereby, add blocks to the blockchain system. Bitcoin miners have to go through a fixed amount of transactions, measured at 1 MB (Megabytes), consequent to which they become eligible for receiving block rewards. These transactions are validated by solving a numerical problem where each miner must strive to be the first one to arrive at the correct answer or the nearest correct answer, so as to receive the block reward.
Taxability under different heads of income
- Income under another source:
It is a known fact that the Income Tax Act, 1961 places any income within 5 heads, where the 5th and last head, ‘Income from Other Sources‘ acts as a residual one, which denotes that any income which is not placed under any of the other 4 preceding income heads will be placed under the same. Here taxable income could be calculated in two manners
- First, the income earned from the Bitcoin reward could be considered as the value of Bitcoin on the day such reward is received and
- The second, that if Bitcoin is declared as a legal tender, any profits made on the exchange of the same for real goods/services could be taxable under this head.
In India, since Bitcoins are not legal tender and hence most appropriate tax treatment under this head will be to treat the value of Bitcoin on the date they were mined as the income of the date on which they were received as rewards.
- Income from Capital Gains
It is often considered that Bitcoin, being a self-generated asset, should be taken to be a capital asset. Any capital assets can generate income under section 45 taxable under the income tax act only when they were transferred or exchange etc.
However, any assessee in India can merely hold on to these bitcoins and cannot exchange the same for actual currency/goods/services, despite its widespread and increasing acceptance in the world which inhibits the transfer of such bitcoins, and there fewer chances of having such capital gain from Bitcoins.
Moreover, income under capital head mandates the cost of acquisition of the capital asset, which is unknown in the present case.
- Income under ‘Profits and Gains of Business & Profession’
A proposal, presently under the consideration of the Central Board of Indirect Taxes and Customs proposes to treat cryptocurrency mining as a ‘Supply of service’ since it generates cryptocurrency and involves rewards and transaction fees. Here, tax is proposed to be collected on the basis of the transaction fees or rewards received by the crypto-miners.
Hence, by application of the abovementioned proposal, it can be safely said that any income earned by such an individual miner or a company (ex. Riot Blockchain, Hive Blockchain, and Marathon Patent Group, etc.) could be coming under the ‘Profits and Gains from Business & Profession’.
Here, the primary requirement would be that the miner or mining company makes profits in this process, especially since getting the reward is not a surety and instead, depends on the skills of the miner. Second, the assessee must fulfill the requisite conditions to be liable for paying taxes in India for the relevant financial year. Third, this income head is appropriate for income earned from bitcoin mining.
Conclusion
Hence, it becomes clear that the taxability of bitcoin mining under the aforementioned heads can be done. Here, if this activity is carried on in a regular manner, it could be taxed under profits and gains from business and if carried on merely as a hobby or for investment purposes alone, it could be taxed under income from capital gains. However, under both the heads if any loss is incurred, then the same could be allowed to be carried forward, in accordance with the existing provisions regulating the same.
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