If they hide these investments from the tax office, they can later be pulled up again. However, if they provide the information when filing their annual income tax returns, they may be questioned as to the legality of the transactions they are making. Some have acquired bitcoins and other popular cryptocurrencies from international sellers by transferring funds from India under the Reserve Bank of India’s Liberalized Remittance Scheme (LRS), which allows a resident to transfer up to $250,000 per year abroad, including in Investing in stocks, bonds and real estate.
Others have bought cryptos online from overseas sellers using their debit and credit cards. However, there are question marks over whether the LRS route and bank cards can be used to buy cryptos abroad. Bankers transferring LRS funds say the facility cannot be used to buy bitcoins directly from India as it is not included in the allowed list of capital account transactions.
It’s one thing to subscribe to Coinbase IPO, but it’s another thing to buy bitcoins directly. At least that’s the impression they get when dealing with RBI.
But what if a person uses the LRS window to open a dollar or euro account at a bank abroad and then uses the money to buy bitcoins abroad? That’s none of our business, say the bankers. But is it also outside the purview of the RBI? An RBI spokesperson declined to comment on whether one can invest in cryptos under LRS. The use of debit or credit cards is done under the pretense that trading cryptos are transactions in “current accounts” (not capital accounts) — a viewpoint that can be challenged.
“While there is no specific provision for buying bitcoins under the LRS and the RBI has not specifically banned cryptocurrencies in India, it remains unclear whether individuals are allowed to buy the same. Additionally, in the absence of clarity as to whether cryptocurrencies are “currencies” or simply a “contract/digital asset” in the hands of the recipient, it would be difficult to classify them for reporting under the LRS as the fields are designed for that Reporting under the form does not provide for such disclosure,” said Tushar Ajinkya, Founder and Managing Partner of ThinkLaw. However, according to Jaideep Reddy, head (technology law) at Nishith Desai Associates, the RBI has not clarified the treatment of crypto assets under FEMA, instead stating that they do not constitute currency.
“They could therefore be treated as intangible assets like intellectual property or software. The importation of an intangible asset is permissible as a current account transaction. However, each transaction must be analyzed for its specific facts and context,” Reddy said. While the use of LRS is unclear, investors are now grappling with the disclosure dilemma. Resident Indians are required to provide details of foreign bank accounts (including accounts on which they sign powers of attorney), real estate or other property located outside the country.
This begs the question: should resident Indians disclose their crypto holdings abroad while filing statements for the 2021-22 assessment year? A spokesman for the direct tax authority CBDT declined to comment, while the professional accounting authority ICAI had no opinion on the matter. Some of the tax experts have advised their clients to avoid cryptos while investing under LRS. “We believe that the RBI does not permit the use of LRS to purchase cryptocurrencies as they are not included in the list of permitted securities specified for purchase under LRS. However, RBI has not taken any action so far as it may not have collected the data,” said Rajesh P Shah, who heads the Chamber of Tax Advisors’ Research Committee.