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HomeImmutableXWhat Is Bitcoin and How Does It Work? – Forbes Advisor INDIA

What Is Bitcoin and How Does It Work? – Forbes Advisor INDIA

Bitcoin is a decentralized digital currency that is exchanged between two parties without the intervention of an intermediary such as a bank or other financial institution.

As defined in a white paper published by Satoshi Nakamoto, the hidden inventor of Bitcoin, Bitcoin “can send online payments directly from one party to another without going through a financial institution. , A pure peer-to-peer version of electronic cash. “

To understand Bitcoin, you need to understand the basic structure, how the Bitcoin ecosystem operates, and the extent to which Bitcoin is used in India.

How does Bitcoin work?

Bitcoin achieves the elimination of intermediation with the help of its underlying technology, blockchain.

Currently, if you need to send money to someone, one possible way is to give them cash or use a trusted intermediary (such as a bank) instead. Both physical cash (using the country’s central bank as a guarantor) and wire transfer mechanisms involve an intermediary (in the latter case, the bank or another financial institution). Transaction costs are incurred if an intermediary is involved.

How blockchain technology can help achieve disintermediation is to replace the trust that intermediaries bring to the table with cryptographic proof by using CPU computing power.

This cryptographic trust is built into Bitcoin through the program’s wallet, public and private keys.

Anyone can create a Bitcoin wallet for free by downloading the Bitcoin program. Each wallet contains a public and private key.

A public key is like an address or account number where anyone can receive Bitcoin.

A private key is like a digital signature for a person to send Bitcoin. The name suggests that the private key should be held and known only by the owner, and the public key can be shared with anyone to receive Bitcoin. You’ve probably heard this in the news that Bitcoin was lost because the private key was inaccessible or stolen by a hacker.

The owner of the Bitcoin address is not explicitly identified, but all transactions on the blockchain are public.

Since the start of Bitcoin in 2009, all transactions that have occurred are stored in the ledger. Ledger is considered immutable, tamper-proof, and irreversible.

Bitcoin transactions are validated through communication network nodes over encryption and recorded in a distributed distributed ledger called the blockchain. This is one of the hallmarks of Bitcoin, unlike other crypto assets that have decentralized exchanges (such as the stock exchange) that need to route or validate every transaction.

How does Bitcoin mining work?

The Bitcoin ecosystem has a network of miners that use the CPU to process transactions.

  • When a user trying to send Bitcoin enters a public address, the number of Bitcoins to send, and attaches a private key to generate a signature, make sure that the encrypted information is sufficient. The task to be sent to the given miner’s network is the balance for forwarding and authenticating the transaction.
  • The faster the miner’s CPU, the more likely it is that the miner will be rewarded with Bitcoin to validate and facilitate the transfer.
  • The miner’s job here is only to provide the CPU power to automatically run the Bitcoin program to verify the Bitcoin transfer. There is no manual intervention by Bitcoin miners.
  • When a transaction is processed by the Bitcoin miner, this number of transactions will be broadcast to the miner’s network to get a copy or download of the same block.
  • These blocks by the timestamp mechanism are stored in the order or time series that form the blockchain. Each miner in the network should have an updated and complete copy of the ledger or blockchain if they want to facilitate the transfer and earn Bitcoin.

The program is built to automatically update your ledger or blockchain.

According to the original white paper on Bitcoin, a copy of the updated ledger carried by each miner has almost no chance of a hacker tampering with the blockchain. If someone attempts to tamper with or hack the ledger in any way to gain unfair profit, the miner is immediately considered invalid and the transaction fails until a copy of the untampered ledger is obtained.

Can Bitcoin be considered a real currency?

It is arguable whether Bitcoin is a currency, and because Bitcoin has no inherent value of its own, why every country wants to replace it with an existing currency.

By definition, a currency is “a system of money commonly used in a particular country” or “the fact or quality that is generally accepted or used”. Currently, the number of companies using Bitcoin as a payment method has some traction, but major countries and economies do not accept Bitcoin as a common money. The exception is El Salvador, which became the first country to adopt Bitcoin as fiat currency in September 2021.

One of the key reasons for the remarkable evolution of Bitcoin is the tightening of KYC (Know Your Customer) and Money Laundering Prevention (AML) regulations by banks and financial institutions. There is now far more cross-border exchange of information between countries regarding transactions through the banking system.

As a result, Bitcoin is also said to be widely used as a parallel mechanism for transactions. Without it, it would be illegal in some countries.

Another important aspect is that Bitcoin is accepted as a global payment mechanism. It is not directly affected by trends in a particular country as it is not linked to the currency of a particular country.

Bitcoin regulation in India

In terms of regulation, India has made two major developments this year.

In February 2022, India proposed that the Government of India introduce taxation on virtual digital assets. This means a cryptocurrency taxation system, but it is clear whether the Government of India considers cryptocurrencies to be legal as “assets” or “currencies”.

Since then, India’s Finance Minister has categorically stated that “taxing cryptocurrencies does not mean legalizing them.” This shows that the government is still assessing all the factors related to cryptocurrencies and it is early to make any assumptions about their legality.

Bitcoin taxation in India

India has not specified a position on the legality of investing in Bitcoin, but the recently announced budget 2022 proposes to introduce a taxing framework for virtual digital assets. Once the financial bill is ratified, the framework will be effective after the 2022-2023 fiscal year.

The taxation proposed by Budget 2022 is the taxation of profits at a 30% tax rate on the transfer of Bitcoin.

The Government has proposed introducing a new section 115BBH into the Income Tax Act of 1961 (“IT Act”) for the taxation of income from the transfer of virtual digital assets. According to the section above, where total income includes income from the transfer of virtual digital assets, that income is subject to a tax rate of 30%, which will be increased if there is an applicable additional charge. And the success of health and education.

As described in Section 2 (47) of the IT Act, a virtual digital asset is an information, code, number, or token (in Indian currency or foreign currency) that provides digital, generated by cryptographic means or other means. Does not mean). Functions as a unit of value store or account, including representations of value exchanged with or without consideration, promises or representations of unique value, or use in financial transactions or investments (provided by investment schemes). Not limited to, transferable), stored or traded electronically.

Therefore, the definition of virtual digital assets is very broad and includes all forms of cryptocurrencies, including Bitcoin.

Therefore, understand that the profits from the transfer of Bitcoin will be subject to a tax rate of 30% (and applicable additional charges and health and education tax rates), with effective tax rates in the range of 31.2%. Is safe. To 42.7%.

Eligibility to claim deductions for spending on Bitcoin acquisition

The proposed provision does not allow deductions for expenditures (other than acquisition costs) incurred by the evaluated person in connection with such digital assets while calculating the profit from the transfer of such assets. It states specifically. Simply put, only digital assets, the cost of acquiring Bitcoin, are deductible.

If a person acquires Bitcoin by mining, it may be treated as a self-generated capital asset. However, the provisions of Section 55 of the IT Act, which provide for the calculation of acquisition costs for self-generated assets, do not specifically specify such a calculation method for cryptocurrencies.

Therefore, it is necessary to provide clarification regarding the calculation of the acquisition cost of Bitcoin when acquired through mining.

Also, if a person obtains Bitcoin as a gift, the recipient of Bitcoin is obliged to be taxed in India, so the definition of “property” based on Section 56 (2) (x) has been revised and virtual digital. Assets are now included. That ambition. This provision also limits taxpayers or investors from offsetting losses from the transfer of virtual digital assets with other income.

Applicability of 1% withholding tax under Section 194S

Budget 2022 also proposed to impose withholding tax on the transfer of virtual digital assets under Section 194S of the IT Act. Therefore, from 1 July 2022, virtual digital assets, that is, those who are responsible for paying the resident in consideration of the transfer of Bitcoin, will deduct 1% withholding tax when deducting that amount. To the resident’s account or at the time of payment, whichever comes first.

Such withholding is subject to the following financial restrictions:

It is not clear about the taxation of virtual digital assets transferred before April 1, 2022

The tax provisions for virtual digital assets (excluding TDS) are proposed to come into effect on April 1, 2022, that is, after the 2022-23 fiscal year. However, it is not clear about the taxation of crypto assets that taxpayers would have transferred, sold or donated by fiscal year 2021-22.

Some taxpayers treat Bitcoin as an asset, capital gains as short-term or long-term (with indexing benefits), depending on holding period, and in some cases tax based on concessional or regular slab rates. I paid.

What happens if I invest in Bitcoin in India?

While there are many uncertainties and volatility in Bitcoin prices and their legality in India, it is certain that blockchain technology promises many innovations and ways to solve transactions.

If you are considering investing in Bitcoin, you should keep in mind that only investors with a high risk appetite should consider investing part of their portfolio in Bitcoin. .. This is due to downside risks, high taxes on profits from the sale of Bitcoin in India, potential goods and services (GST) tax exposures, and uncertainty arising from Bitcoin’s legal status in India. It is due to.

For investors who already own Bitcoin, there is no need to panic even if regulations are banned, and provisional sales rules may be in place. Those who have invested in Bitcoin and sold the same, but have not reported profits in their tax returns, should be willing to declare their investment.

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