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India Turns Attention to Bitcoin Exchanges to Investigate Tax Evasion

Reading Time: 2 minutes by on December 17, 2017 Bitcoin, Business, Commentary, Finance, News, Regulation
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On December 13, 2017, the Indian income-tax department reportedly conducted surveys at bitcoin exchanges across the country to assess the risk of individuals who may have evaded taxes.

Surveying Indian Exchanges

Typically such surveys are conducted by the department without prior warning and include relatively extensive scrutiny of the assessee’s account books and related assets. According to a spokesperson, exchanges from Mumbai, Pune, Bengaluru, Delhi, Hyderabad, and Gurugram were surveyed.

None of the significant cryptocurrency exchanges in India have since commented on this report, with the sole exception of Coinome, a relatively new exchange. The Chief Operating Officer of which denied knowledge of any such survey.

Considering that the Income Tax department currently seems to be targeting virtual currency profits from before March 2017, that statement does start to make sense, given that Coinome was only recently launched in November 2017.

Global Attention and Tax Concerns

Bitcoin aided tax evasion and money laundering have been two major concerns for tax authorities around the world for quite some time now. But with the cryptocurrency’s seventeen-fold price jump in 2017, many countries are now coming down hard on the digital currency market.

For instance, In September 2017, China banned Initial Coin Offerings (ICOs) and forced exchanges operating within the country to cease operations effective immediately. Other countries were a little more moderate in their approach, but almost all of them have warned investors that their bitcoin profits will be taxable.

According to CoinMarketCap, bitcoin is currently at just under $17,000, with a market capitalization of around $280 billion, exceeding that of every other digital currency by a sizable margin. It also accounts for a large chunk of the combined cryptocurrency market cap at approximately $519 billion.

Despite the Indian income tax department’s crackdown on tax evasion in the cryptocurrency market, the country’s central bank, Reserve Bank of India (RBI), continues to maintain its long-standing silence on the legal state of virtual currencies. It remains evident, however, through numerous related press releases and announcements, that the Indian government remains skeptical of the decentralized and unregulated nature of cryptocurrencies.

India’s Relationship with Cryptocurrencies

On December 5, 2017, a press release by the RBI cautioned the public against the “Potential financial, operational, legal, customer protection, and security-related risks,” emanating from the cryptocurrency ecosystem. This announcement is nothing new for the central bank. Throughout 2017, the RBI has emphasized that it does not recognize bitcoin or other digital currencies as legal tender and has continually discouraged its use for transactions.

In the absence of a proper framework detailing the legality and taxation of digital assets, investors have very little information to go on at the time of filing their taxes. However, if Zebpay, one of India’s most popular Bitcoin exchanges, is to be believed, profits from cryptocurrency investments are to be recognized as capital gains.

In India, capital gains accrued within the first three years of purchase are classified as “Short-term,” whereas any duration over that would be subject to a lower tax percentage, because of the “Long-term” categorization.

Interestingly, in September 2017, a report emerged claiming that the RBI was looking to launch a state-backed digital currency to compete with the likes of bitcoin. A similar enterprise, dubbed “Crypto-Ruble,” was announced by Russia in October 2017. Since India’s banknote demonetization in 2016, the government has been encouraging digital transactions over cash usage, likely because the tax authority can easily monitor the former.

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