even if he were to pay tax on all 5 bitcoins at the price they were purchased and then capital gains tax on the 1 bitcoin he sold, how would he show the department where the money equivalent to the 5 bitcoins are? he has not sold some of them and so they are not in his bank account. Won't they ask him about it?
That is correct - tax on income from other sources (on the 5 bitcoins) and capital gains (on the 1 sold).
The IT department won't ask you where the money is. Even if they do, you have bitcoins to show for it.
Theoretically, you could have earned 1 lakh and bought 5 bitcoins. This is no different.
Ha ha ha ....With Indian Tax authority they cant even track Indian Rupess. Possibly 90% tax man do not know what is Bitcoin and even if they know they can't do anything as they are too lazy as they will not gain anything from it.