Bitcoin was the first digital cryptocurrency created by an entity that goes by the name of Satoshi Nakamoto. It is a decentralized digital currency that has no central bank or single administrator. Bitcoin is built on the blockchain system and exists within the Bitcoin Blockchain network. All Bitcoin transactions are verified by network nodes through cryptography, once a transaction is verified it is added to a distributed ledger called the Bitcoin Blockchain. Only once this transaction is added to the Bitcoin Blockchain ledger will it be considered a complete and valid transaction. There are various assessment number crunchers that make Bitcoin tax reporting simple.
The project aims to build a trading platform and is supported, among others by billionaire VC fund Tim Draper.
The blockchain technology uses an open-ledger system to record transactions, it’s something like a time-stamped series of data that are immutably linked to one another through strong cryptography. The entire system is managed by a cluster of computers called network nodes, these nodes authenticate all transactions in the blockchain and all nodes need to unanimously authenticate the transaction for it to be valid. The main feature of blockchain is that it has decentralized control and no single entity has control over the network.
Bitcoin mining is the process of authenticating transactions and adding them to the Bitcoin Blockchain. Transactions are authenticated by completing complex math problems that contain cryptographic hash functions related to the transaction in question. Bitcoin mining has two functions. Firstly, when computers solve these complex math problems with transaction-related hash functions they produce a new Bitcoin that is added to the network. Secondly, by authenticating these transactions Bitcoin miners make the Bitcoin Blockchain trustworthy and secure also check the best analysis bitcoin tax software and tax tool for Bitcoins.
Rewards for Bitcoin mining
As compensation for their efforts, Bitcoin miners are awarded Bitcoin when they add a new block to the Bitcoin Blockchain. The amount of Bitcoin released for each new block added to the Bitcoin blockchain is called the “block reward”. Every 2,10,000 blocks the block reward is halved. The total number of Bitcoin that will enter circulation is limited to 21 million, as more and more Bitcoin is mined it will gain value over time and will become costlier to mine.
The legality of Bitcoin in India
On 1st February 2018 the late Finance Minister of India, Mr. Arun Jaitley, stated that the government will do everything in its power to stop the use of Bitcoin and other digital currencies for criminal activities. The Indian Government does not recognize Bitcoin or any other digital currency as legal tender but will encourage the use of blockchain technology in payment systems.
In 2018 the Reserve Bank of India (RBI) banned the sale or purchase of cryptocurrencies for entities regulated by the RBI.
In 2019 the Supreme Court of India received a petition challenging the legality of
cryptocurrencies and sought direction or restriction of their transactions.
Advantages of Bitcoin
Bitcoin and other cryptocurrencies have a number of advantages over the traditional fiat currencies.
As Bitcoin and other cryptocurrencies go through a network of computers to be authenticated and not through multiple intermediaries that have costs attached for authentication of transactions, they are a more cost-effective way to perform transactions.
Since Bitcoin operates on the blockchain, which is an open-ledger that everyone on the network can access, it provides an unparalleled level of transparency for transactions. Any discrepancies will cause an error in the system and a new block will not be added, causing the transaction to fail.
Bitcoin operates on the Bitcoin Blockchain network. Blockchain is a decentralized system, where each node in the network authenticates the transaction and new Bitcoins are only produced when a new block is added to the chain. It is a self-regulating system. There is no single computer or entity in control of the network, thereby, reducing the risk of price manipulation.
Tax on Bitcoin
Presently, in India, there are no tax regulations in place for cryptocurrencies like Bitcoin. So all information on Bitcoin taxes is purely speculative. Let’s see how Bitcoin might be taxed after regulations have been put in place.
Transfer of Bitcoin to Fiat
When a Bitcoin is exchanged for a fiat currency, the price differential between the buying price of Bitcoin and selling price will be considered taxable income. The duration for which the Bitcoin is held will determine the head under which it will be taxed.
Bitcoins held longer than 36 months are considered long-term capital assets, and therefore, any income arising from the sale of these assets will be taxed at a flat rate of 20% under the head Long-Term Capital Gains. Income arising from the sale of Bitcoins held for periods of less than 36 months or traded regularly will be considered a business income and will be taxed according to the appropriate tax slab.
Even though Bitcoin mining is a capital intensive activity that consumes a lot of electricity and requires expensive hardware. The Bitcoins generated as a result of mining are self-generated, and therefore, the cost of acquisition cannot be determined.
Even though Section 55 of the Income Tax Act, 1961 dictates the calculation required to be performed in case of self-generating assets, it does not include Bitcoin mining. Therefore, it is not clear how Bitcoin mining will be taxed under future regulations.
Payments received in Bitcoin
Many businesses use Bitcoin as a means to receive payments. Any payments received by a business for goods or services through Bitcoin will be considered a business income and will be taxed appropriately. Tax in such a case will be levied under the head of Profits or Gains from a business.
Bitcoin is one of the most prominent cryptocurrencies in the world, and when tax regulations for cryptocurrencies are formulated it might still be the most preferred cryptocurrency in the market. So if you’re seeking to invest in Bitcoin in the future it will be very helpful to know all the tax regulations that come along with it.