Internal Revenue Service (IRS) has announced that Bitcoin will be treated as property, which means that Americans will have to pay tax when mining Bitcoin and on any capital gains from using the virtual currency while making purchases.
The IRS also said that wages paid to employees using virtual currency are taxable to the employee and must be reported by an employer. This is also applicable to payments made to independent contractors and other service providers as well, although self-employment tax rules will be applicable here. Capital gains or losses from the use of Bitcoin will depend on whether the individual treated the currency as a capital (an asset used to make money and not something you own for personal consumption) asset or not.
What is capital gain?: Let’s say that you bought or mined Bitcoin when it was priced at $550 and today you decided to buy something for one Bitcoin, while the virtual currency has a value of $573. In this case, you have a capital gain of $23, on which you’ll need to pay a tax. On the other hand, if you bought or mined a Bitcoin at it’s peak price of $1,200 last year and decided to buy something with it today, when Bitcoin is priced at $573, you will face a capital loss of $427. Americans can deduct this amount while filing tax returns.
What does this mean for India?: Till now there hasn’t been any official announcement from the Income Tax department, but members in the Indian Bitcoin community were told to pay taxes on the Bitcoin they mined, based on its valuation on the day it was mined. Bitcoin exchange owners were also told to collect sales tax when selling Bitcoin. These are pretty close to what IRS has announced, but these policies needs to have more details before businesses start adopting the crypt-currency in India.
The RBI or the Finance Ministry needs to come up with clear policies on how it treats Bitcoin. A notice was sent to the RBI earlier this year seeking clarification on various aspects around Bitcoin. RBI was asked if it plans to treat virtual currency – as a foreign currency, domestic currency, private currency, commodity, software program or as an electronic document. It was also asked if RBI has the power to regulate virtual currencies and if so, under what law.
Then last month, RBI governor Raghuram Rajan raised questions about the stability of Bitcoin prices. RBI had earlier announced that it does not intend to regulate virtual currencies in India, that being the case, it’s not clear what the governor intends to do going forward – it doesn’t want to ban it, doesn’t want to regulate it, doesn’t want to ignore it and doesn’t want people to use it either due to the risks involved.