Budget 2025: Will Budget increase income tax on Bitcoin ETFs to 30% from 12.5%?

The year 2024 concluded with two big news events, the first one is that the United States elected Donald Trump as its 47th President and second is the Bitcoin price surpassed $1,000,000.

So, what’s the link between India’s 2025 Budget, Donald Trump, and Bitcoin? The link is strong.

First, let’s start with some context. Bitcoin is a cryptocurrency notable for its fragility, encryption, anonymity, and being an asset without fundamental value. The price of Bitcoin increased following the announcement that Donald Trump had won the 2024 US Presidential Election. Trump’s election promise to keep the Bitcoin controlled by the federal government and establish a national Bitcoin reserve enhanced investor confidence.

Bitcoin ETFs: What are they and how do they work?

Till January 2023, investors could only invest in Bitcoin directly on unregulated or semi-regulated exchanges. Following that, investors had another option for investing in Bitcoins that is Bitcoin Exchange-Traded Funds (ETFs). Bitcoin Spot ETFs differ from Bitcoin futures ETFs. The Spot ETF holds Bitcoin, but futures-based ETFs generate positions via derivatives.

The Bitcoin ETF enables investors to gain exposure to Bitcoin without actually owning the cryptocurrency in digital wallets or hard disks. This will reduce concerns about potential cyber attacks and the complexities of keeping complicated passwords saved on hard drives. Bitcoin ETFs trade on the Nasdaq and NYSE.

Income tax on Bitcoin ETFs remains unclear

A significant tax question emerges for an Indian person who invests in Bitcoin ETFs in the US market. The question is whether capital gains derived from the selling of Bitcoin ETFs should be taxed under Sections 115BBH, 50AA, or 112 of the Indian Income Tax Act, 1961. The Budget 2022 included Section 115BBH, which taxes profits from the sale of Virtual Digital Assets (VDA), including cryptocurrencies like Bitcoin.

Section 50AA is a specific provision included in the Budget 2023 to tax the income from specified mutual funds that do not invest more than 35% of their total proceeds in equity shares of domestic enterprises. The scope of the tax was expanded by the Budget 2024 to include income from designated mutual funds that invest more than 65% of their total proceeds in debt-based securities, such as debt and money market instruments.

Section 112 serves as a residual provision, governing the taxation of long-term capital gains from any capital asset not covered by the special provisions. Section 112 states that short-term capital gains from any asset other than those covered by Section 111A (for example- listed equity shares) are taxed at the applicable tax rate.

Let’s understand all this Section separately.

Section 115BBH: Tax on Income from Virtual Digital Assets

This section states that the income from the sale of virtual digital assets is taxable under Section 115BBH. Income is taxed at a fixed rate of 30%. A “virtual digital asset” is defined as cryptocurrencies, NFTs, and any other digital asset that has been notified. Bitcoin ETF units may not be protected by VDA because investors did not invest directly in the cryptocurrency. Instead, Asset Management Companies (AMCs) may be taxed under this rule. Given that these USA AMCs are not taxed in India, investors are not required to pay tax under Section 115BBH in this case.

However, if the government classifies Bitcoin Spot ETF as VDA in the third category indicated above, the resulting gains may be taxed under this provision. Until then, this provision may not apply.

Section 50AA: Tax on Capital Gains from certain Mutual Funds

Section 50AA specifies requirements for calculating capital gains from transferring units of a Specified Mutual Fund (“SMF”). The term “specified mutual fund” refers to a mutual fund (including ETFs) that invests more than 65% of its total proceeds in debt-based securities such as debt instruments and money market instruments. Bitcoin ETFs should be excluded from taxation under Section 50AA because they do not invest in debt instruments.

Section 112: Tax on Long-term Capital Gains

Section 112 is a residuary provision that taxes long-term capital gains derived from the transfer of any capital asset. This provision applies when other special provisions are not used to tax long-term capital gains. According to Section 112, long-term capital gains generated by the transfer of a long-term capital asset on or after July 23, 2024 are taxed at 12.5% without indexation. Where the capital asset is transferred on or before July 22, 2024, the long-term capital gain will be taxed at 20% after the indexation benefit.

Units held for more than 24 months (after July 23, 2024) but before the selling date should be considered long-term capital assets in Bitcoin ETFs. If it is sold on or before July 22, 2024, the holding term will be 36 months.

CONCLUSION

Section 50AA may not apply to tax benefits deriving from the transfer of such units since they do not fall under the description of “specified mutual funds”. Similarly, Section 115BBH may apply only if the CBDT issues a notification specifically defining Bitcoin ETFs as VDAs.

According to current income tax law, long-term gains from the selling of Bitcoin ETFs are likely to be taxed under Section 112 of the Income Tax Act. Thus, long-term capital gains would be taxed at 12.5%. Furthermore, short-term capital gains will be taxed at the rate applicable to the taxpayer’s income.

Although, the government’s intention when it introduced Section 115BBH in Budget 2022 was to dissuade Indian investors from engaging in Bitcoin and other cryptocurrencies.

As therefore, in this Budget, the government should clarify whether the current interpretation of the provision is correct, i.e., whether LTCG on Bitcoin ETFs is taxable under Section 112 at a lower tax rate of 12.5%, or whether the gains are taxable at a flat 30%, as is the case with gains arising from the sale of bitcoins and other cryptocurrency.