Tax Implications of Bitcoin ETF Investments in India
Tax Implications of Bitcoin ETF Investments in India

Bitcoin ETF Investments in India: The rising interest in Bitcoin Exchange-Traded Funds (ETFs) in India has sparked curiosity regarding potential tax benefits. Investors are keen to explore whether investing in Bitcoin ETFs could offer an escape from India’s 30% tax rate on bitcoins.

Our aims to demystify the complexities surrounding the taxability of Bitcoin ETF gains, examining relevant sections of the Indian Income Tax Act and assessing the potential impact of regulatory changes and Securities and Exchange Board of India (SEBI) approval.

How to Buy US Bitcoin ETFs

Embarking on the cryptocurrency investment journey involves setting up a brokerage account, either through a global or local platform. The account initiation is a seamless, paperless process requiring identification and address proofs.

Following activation, funding the account in foreign currency aligns with the guidelines of the Reserve Bank of India’s Liberalized Remittance Scheme (LRS), allowing individual investors to remit up to $250,000 per financial year.

Investing in a US Bitcoin ETF differs from local exchanges, incurring additional charges such as foreign conversion fees (1-1.5%) and brokerage charges.

While Bitcoin Spot ETFs have recently emerged in the United States, Indian investors anticipate their availability, prompting questions about potential taxation.

Tax Implications of Bitcoin Spot ETFs under Indian Law

A crucial aspect revolves around the definition of Virtual Digital Assets (VDA), which comprises three distinct classes:

Class 1: Information, code, number, or token generated through cryptographic means – This unequivocally encompasses Bitcoin itself.

Class 2: Non-fungible tokens (NFTs)

Class 3: Any other digital asset notified by the government

Section 115BBH of Income Tax Act, 1961

  • Imposes a 30% tax on income derived from transferring Virtual Digital Assets (VDAs), including Bitcoin.
  • VDA definition includes classes like information, code, non-fungible tokens (NFTs), and other digital assets.
  • Bitcoin ETF units may not fall within Class 1, as investors don’t directly hold Bitcoin; instead, AMCs managing ETFs hold the underlying assets.
  • Possibility of taxation on AMCs rather than individual investors unless explicitly included in Class 3 through government notification.

Section 50AA of Income Tax Act,1961

  • Covers tax on capital gains from specified mutual funds or ETFs.
  • Applies to Specified Mutual Funds (SMFs) with less than 35% of total assets in domestic company equity shares.
  • Not applicable to Bitcoin Spot ETFs as SEBI prohibits direct investment in Bitcoin.

Section 112 of Income Tax Act,1961

  • Deals with tax on long-term capital gains.
  • Bitcoin Spot ETF units, if held for the required period of more than 36 month, could be considered long-term capital assets, taxed at 20% with indexation benefits.

Potential Impact of Regulatory Changes and SEBI Approval

Regulatory Changes

  • Reclassification of Bitcoin Spot ETFs as VDAs through notification could subject them to the 30% tax rate.
  • Introduction of new tax provisions or clarification of existing sections might alter the tax landscape.

SEBI Approval

  • SEBI’s stance on Bitcoin investments and Spot ETFs influences tax treatment.
  • Approval could lead to a unique tax framework for Bitcoin Spot ETFs, potentially distinct from current rules.
  • Continued restrictions might limit growth and accessibility of these instruments in the Indian market.

Implications for Investors

  • Increased volatility due to regulatory changes.
  • Altered tax obligations impacting profitability.
  • Need for continuous adaptation based on evolving regulations.

While the current tax outlook for Bitcoin Spot ETFs in India appears favorable, potential regulatory changes and SEBI’s stance remain critical considerations.

Staying informed and seeking professional guidance are essential for navigating this dynamic landscape, ensuring investors make informed decisions to optimize tax benefits and maximize returns.

Disclaimer: This analysis reflects the current legal framework and is subject to potential changes based on Indian government laws and regulations. It’s advisable to stay updated on developments and seek professional advice for accurate guidance.

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