Officials in India are investigating the possibility of subjecting cryptocurrencies to the income tax. That might make India one of the first major nations to start collecting income tax on altcoin assets.

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“We are looking at collecting information about modus operandi of bitcoin exchanges, investors, their source of investment and possibility of collecting tax,” Surabhi Ahluwalia, a spokesperson for the Central Board of Direct Taxes, told Reuters earlier this month.

The recent high bitcoin prices have apparently attracted the board’s attention, Quartz reported. Volumes at some Indian cryptocurrency exchanges have doubled in the past month.

Several Indian cryptocurrency exchanges, including Zebpay, Coinome, Unocoin, Coinsecure, and Koinex, may have been contacted by tax officials. The officials are looking into owners of large amounts of cryptocurrency, Unocoin CEO Sathvik Vishwanath told Quartz.

Officials might consider earnings on cryptocurrency as capital gains, another exchange executive told Quartz. Coinsecure reported that it had received requests for data in order to consider bitcoin’s potential as a taxable asset.

“The top people who have made maximum gains are the ones who are going to be under the scanner,” an unidentified Indian tax lawyer told Quartz.

India might subject cryptocurrency to the income tax

The Indian government plans to collect a 5% tax on individual incomes that exceed 250,000 rupees ($3,902.50) in 2018. That tax goes up to 20% for incomes between 500,001 rupees ($7,805.02) and 10 million rupees ($15,610), and to 30% for incomes over 10 million rupees.

So far, tax officials in India have ignored cryptocurrency. That might change because of recent news stories about the explosive growth of cryptocurrency exchanges.

Interest in cryptocurrencies has soared on the subcontinent, and The Economic Times reported that the Android-based Zebpay was adding 2,500 users a day in May 2017. One reason for the interest in cryptocurrency in India was Prime Minister Narendra Modi’s decision to declare 86% of the cash in the country worthless through demonetization in November 2016. The main pretext for demonetization was to combat money laundering and increase the tax base. Demonetization has convinced many Indians to start searching for alternatives to paper cash.

Indian government and central bank study regulation, licensing

The Indian Finance Ministry and the Reserve Bank of India are reportedly conducting audits of cryptocurrency exchanges that might form the basis of regulation or taxation. One potential use for the data collected is to create a licensing system for cryptocurrency businesses, banking platform Cashaa CEO Kumar Gaurav told The Hindu. Gaurav believes the Finance Ministry considers the cryptocurrency market too small to regulate.

A Finance Ministry committee did submit one report on cryptocurrency regulation in India in August. The report was supposed to propose a regulatory framework for cryptocurrency, but no such rules have been announced.

Many observers expect the Reserve Bank of India to regulate cryptocurrency at some point. Digital currency exchanges are regulated by India’s Securities and Exchange Board, so that entity might also supervise cryptocurrency.

Cryptocurrency in India

The amount of cryptocurrency trading in India is very small; only about $3.5 million worth of bitcoin was traded in September, India Briefing reported. In contrast, $36 million worth of bitcoin was traded in the United States in the same month.

The potential for massive growth in India’s cryptocurrency market is certainly there, as around 40% of the nation’s 1.3 billion people own smartphones. Cryptocurrency purchases can be hard in India because of strict regulations on cross-border currency transactions.

Another reason why cryptocurrency adoption has been slow in India is higher costs. Bitcoin prices in the nation are often 5% to 10% higher than those in other countries, mostly because of a lack of local mining capacity in India. That means most Indians have to purchase altcoins from foreign miners, which can be expensive.

One reason for that is India’s very unreliable electric grid, which makes large-scale cryptocurrency mining difficult in the country. Successful cryptocurrency mining requires large amounts of cheap, reliable electricity, something that many locales in India lack.

Cryptocurrency and the Indian remittance market

Cryptocurrency investors have shown a lot of interest in India because it is the world’s largest destination for remittances, the World Bank reported. Indians received about $62.7 billion in remittance funds from friends and relatives in other countries in 2016.

Remittances are among the main areas targeted by cryptocurrency entrepreneurs because of the size of the traffic; about $429 billion in remittances were sent in 2016. Remittances might be why the Central Board is investigating cryptocurrencies.

The amount of remittance money sent to India fell by 8.9% between 2015 and 2016, dropping from $68.9 billion to $62.7 billion in a year. Officials might be trying to determine if the $6.2 billion drop in remittances is a sign that money is being moved through other methods, such as cryptocurrency.

A number of companies are offering cryptocurrency remittance solutions. At least one of those companies, Coins.ph, has met with some success in the Philippines, where it claims to have more than 1 million users, Forbes reported. Coins.ph has attracted several competitors, including Toast, and Satoshi Citadel Industries, but none of those companies is specifically targeting Indian remittances.

The recognition of cryptocurrency as a taxable asset in India might increase the value of popular altcoins such as bitcoin and ethereum. Taxing cryptocurrency would give governments a reason to encourage their use and increase market volumes.

Taxation and regulation of cryptocurrency in India might lay the groundwork for one of the world’s largest cryptocurrency markets. Every investor should pay close attention to the Indian government’s plans for cryptocurrency.