Since the Union Budget on February 1, 2018, cryptocurrency has been in the spotlight and the government is beginning to realize the immense tax potential that lies in it.Earlier this week, the Income Tax department issued notices to around one lakh people who invested in cryptocurrencies. CIO India talks to Ajeet Khurana, head of the Blockchain and Cryptocurrency Committee of India (BACC) and tax expert Ganesh Prasad, to get an understanding of cryptocurrency taxation, and how difficult is it for the government to track down undisclosed earnings.\u00a0\u201cThis move can further increase the tax base to some extent, and this is good news for the economy. It\u2019s also a welcome move for the industry as we (BACC) definitely want to be a regulated industry.\u201dAjeet Khurana, \u00a0Head \u2013 Blockchain and Cryptocurrency Committee of IndiaGanesh Prasad, Partner at Khaitan & Co. says that although there\u2019s no specific provision under the IT Act, nothing stops the government from sending notices to bitcoin investors.Khurana reveals that a lot of bitcoin investment in India is based on the assumption that the government doesn't have a cryptocurrency-related tax vision, and therefore bitcoins are not taxed. \u201cThis is a wrong interpretation of the tax provisions. Anything you make money on will always be taxed,\u201d he says. He goes on to highlight that there might be some among these bitcoin investors who are not necessarily tax-payers. \u201cThis move can further increase the tax base to some extent and is a good news for the economy. It\u2019s also a welcome move for the industry as we definitely want to be regulated,\u201d he explains.So how hard is it for the govt. to track bitcoin investments?Prasad says that most bitcoin providers today are following stringent KYC norms and investment into bitcoins usually happens through normal banking channels. \u201cThat said, there could be a few rogue cases, like with every other currency that may be done under the radar, making it difficult for the government to track. Transactions can be difficult to track, but it\u2019s not impossible,\u201d he explains.Khurana opines that there is one foolproof method for the government to track these transactions: If they encourage people to trade on exchanges, all the provisions and regulations applicable to the financial sector, for instance, KYC and anti-money laundering, will be implied on cryptocurrency transactions.\u201cIf the transactions go through us, then tracking them can become extremely easy. As Aadhaar and PAN card details are available with exchanges such as ours, the government can seek information around people's investments, and we'll provide it to them,\u201d explains Khurana.\u201cIf we go by generally accepted accounting principles, cryptocurrency will probably be taxed on par with capital gains - either long-term or short-term gains. However, if someone trades very frequently, they could be termed as business gains or business loss.\u201dThe BACC wants the government to discourage any non-exchange based transactions, as this can help them become a clean and regulated industry. A member opening an exchange account needs to submit copies of his\/her PAN and Aadhaar cards, and upon verification, submit a canceled check from a specific bank account. Buying and selling of cryptocurrency can only happen on this designated bank account.\u201cWe have information about every micro-transaction made through the exchange, and we've expressed our willingness to share this information with regulatory authorities, and we did share the information when they asked us in December,\u201d reveals Khurana.Income tax laws addressing cryptocurrency investmentsCurrently, the only ambiguous part\u00a0is the government\u2019s plans to classify cryptocurrency for income tax returns. \u201cIf we go by generally accepted accounting principles, cryptocurrency will probably be taxed on par with capital gains - either long-term or short-term gains. However, if someone trades very frequently, they could be termed as business gains or business loss,\u201d says Khurana.Long-term capital gains are usually taxed at 20 percent. Therefore,\u00a0the IT notices sent out asked for an advanced tax payment of 20 percent.Until there's more clarity on cryptocurrency being treated as a long term or short term capital gain, it will be treated as any other asset to be taxed.