Giving bitcoins as a 'gift' new fad among investors to escape taxes

While Income Tax department is sharpening its noose around Bitcoin investors, the tech-savvy crypto investors have found new ways to avoid taxes. The latest being 'gifting' the bitcoins to their family members and relatives based abroad and dealing in cash via decentralised exchanges. 

A decentralised exchange is one that does not depend on a third-party service to hold the customer's funds. Instead, trades take place directly between users (peer to peer) through an automated process. The major advantage of this model is the privacy it provides as users need not disclose their personal details to anyone. 

A report in Economic Times stated many Bitcoin investors who had received tax notices by I-T department filed replies, saying they have already ‘gifted’ the cryptocurrency. 

"While some of the investors have transferred or gifted the bitcoins to their relatives and friends, in most cases this is just a traditional round tripping exercise where the seller gets cash for transferring the bitcoins," noted the ET report, quoting people close to the development. 

Hesham Rehman, CEO & Co-founder, of Warangal-based cryptocurrency exchange Bitxoxo noted that people may have been easily gaming the system to avoid taxes as no transparent rules are there to follow.

"If a Bitcoin investor transfers Rs 1 lakh worth of Bitcoins to someone, say in Australia, and the tax department questions him on why he didn't pay taxes, he can easily feign innocence saying he didn’t know how much was needed to be paid,” he said. 

He added that not all investors are averse to paying taxes, therefore all can't be held accountable for lack of regulations. Stipulating a proper tax structure on the part of govt and Reserve Bank of India (RBI) is required, he said. 

An active Bitcoin investor, on the request of anonymity, also expressed the need to regulate the cryptocurrency trade in the country.  

"There are platforms like decentralised exchanges that are making it difficult for the government to track the transactions as people with unaccountable cash can easily rope that into these platforms. This is happening at some of the places already and government should crack down on those, instead of going behind exchanges,” he said.  

“Anyone with an intention to avoid paying taxes won't transact via well-known exchanges anyway,” he added.  

Income tax department has sent tax notices to tens of thousands of people dealing in cryptocurrency after a nationwide survey showed more than $3.5 billion worth of transactions have been conducted over a 17-month period, reported Reuters. 

Meanwhile, the government has issued repeated warnings against virtual currencies, saying these were like “Ponzi schemes” that offer unusually high returns to investors.

But it has not so far imposed curbs on an industry estimated to be adding 200,000 users in the country every month. Earlier this month, an Indonesian firm noted that one in every 10 bitcoin transactions in the world happens in India.

Bitcoin soared more than 1,700% last year, hitting a record high just shy of $20,000 as institutional and retail investors around the world lapped up the virtual currency. 

Currently, one Bitcoin is worth over Rs 7 lakh in India.