ITAT ruling: Cryptocurrencies now recognised as capital assets for taxation

Income Tax Appellate Tribunal has ruled that cryptocurrencies are considered capital assets, clarifying how profits from crypto sales should be taxed. The ruling applies to transactions before 2022.

In a landmark ruling, the Income Tax Appellate Tribunal (ITAT) in Jodhpur has provided clarity on the tax treatment of cryptocurrencies in India. The decision, which recognises cryptocurrencies as capital assets, impacts how gains from cryptocurrency sales are taxed, especially for transactions that occurred before the government introduced specific regulations for Virtual Digital Assets (VDAs) in 2022.

 

The ITAT ruled that cryptocurrencies are assets and that profits from their sale should be classified as capital gains rather than income from other sources. This distinction is significant because, before the ruling, there was no clear direction on whether cryptocurrency profits should be treated as capital gains or under the head of "income from other sources."

 

For investors, this means that profits made from the sale of cryptocurrencies are subject to capital gains tax rather than higher-income tax rates. The ruling sets the precedent that cryptocurrency sales, especially those made before the formal regulations for VDAs were introduced in 2022, should be treated as sales of capital assets.

 

The case at hand:

• The case that the ITAT was hearing involved a person who bought cryptocurrencies worth Rs 5.05 lakh in 2015-16 and sold them in 2020-21 for Rs 6.69 crore, making a significant profit.
• Since the person held the cryptocurrency for more than three years, the ITAT agreed that the profit should be treated as long-term capital gains. This is important because long-term capital gains usually have lower tax rates than short-term capital gains.

 

The ITAT directed the tax officer to allow the person the deduction benefits available under the law for long-term capital gains. This means that the taxpayer could claim deductions or exemptions that apply to long-term investments, reducing the amount of tax they have to pay.

 

Key points of the ruling:

Cryptocurrencies are "Capital Assets": The ITAT ruling clarifies that cryptocurrencies like Bitcoin, Ethereum, and other virtual digital assets (VDAs) are considered capital assets. This is important because it determines how any profits made from buying and selling these assets are taxed.

 

Capital Gains Tax (Before 2022): Before the government's specific cryptocurrency tax rules in 2022, the profits from selling crypto were treated as capital gains (like profits from selling property or stocks), not as income. This means if you sold crypto before 2022 and made a profit, you should have treated that profit as a capital gain and paid tax accordingly.  If you held the crypto for over 3 years, you could claim it as long-term capital gains, which would likely result in lower taxes.

 

Example: Let’s say in 2020, you bought 1 Bitcoin for Rs 20,00,000, and in 2021, you sold it for Rs 40,00,000, making a profit of Rs 20,00,000. According to this ruling, the profit would be taxed as a capital gain (not as "income from other sources").

 

Capital Gains Tax (After April 1, 2022): Since the government introduced specific cryptocurrency tax laws from April 1, 2022, any profits from crypto sales are taxed at a flat rate of 30%. This includes any profits made from buying and selling cryptocurrencies after this date, and the tax applies even if you have short-term or long-term holdings. Regardless of whether it’s a long-term or short-term gain, any crypto profit made from April 2022 onwards is taxed at 30%.

 

Example: If in 2023, you bought 1 Bitcoin for Rs 30,00,000 and sold it for Rs 40,00,000, you would have to pay a 30% tax on the Rs 10,00,000 profit, which equals Rs 3,00,000, in addition to any applicable surcharge and cess. 

"ITAT's decision offers the required guidance for transactions before AY 2022-23, which had no specific rates or definitions under the IT Act. Basis the ITAT’s decision, gains from the sale of cryptocurrencies may be treated as capital gains rather than income from other sources, thus subjecting them to capital gains tax. Additionally, taxpayers may claim exemptions associated with capital gains. For instance, in this case, the taxpayer held Bitcoin for more than 36 months and thus availed of the exemption under Section 54F of the IT Act, which pertains to cases where capital gains arising from the transfer of long-term capital assets are used for the purchase or construction of a residential house, subject to various conditions," said Kunal Savani, Partner, Cyril Amarchand Mangaldas.

   

Implications for Crypto Investors:

• Pre-2022 Sales: If you made a profit before the 2022 tax rules came into play, those profits should be treated as capital gains (not income) for tax purposes, and you'll need to follow the capital gains tax rates.
• Post-2022 Sales: Any profits made after April 1, 2022, will be taxed at 30%, a substantial flat rate, with no deductions allowed.
• Record Keeping: Crypto investors must keep detailed records of their transactions, including the dates of purchase and sale, as well as the profits made. This will help in calculating the tax liabilities correctly.

 

Why is this important? 

This ruling provides much-needed clarity for cryptocurrency investors in India. Before this, there was confusion over how cryptocurrency profits should be taxed, as the government did not have clear guidelines on virtual digital assets (VDAs). Now, with this decision, it’s clear that cryptocurrencies are treated like any other capital asset and will be taxed accordingly.

 

In short:

 

• Pre-2022 profits: Taxed as capital gains.
• Post-2022 profits: Taxed at 30% flat.

This will impact how investors plan their crypto investments, as they will need to account for taxes on their profits based on when they sold their cryptocurrencies.  "ITAT's ruling is a significant step in bringing clarity to crypto taxation in India. By recognising crypto as capital assets, it provides much-needed relief for investors who sold crypto before 2022, allowing them to benefit from long-term capital gains tax rates. This decision ensures fairness and aligns crypto taxation with traditional assets like stocks and real estate. For the industry, it’s a clear signal that regulatory frameworks are maturing, paving the way for a more structured ecosystem. The ruling also paves the way for future crypto taxation reforms, potentially introducing a distinction between long-term and short-term gains from crypto investments. Investors, however, must maintain meticulous records to navigate evolving tax rules effectively," said  Edul Patel, CEO of Mudrex.  "Historically, there has been considerable ambiguity surrounding the taxation of profits derived from cryptocurrency, as the government has not provided definitive guidelines regarding virtual digital assets (VDAs). The ruling not only recognises Bitcoin as a capital asset but also delineates how transactions involving such assets should be treated prior to the establishment of a formal tax regime in 2022. ..This ruling will impact cryptocurrency holders' investment strategies, necessitating careful consideration of the timing of their transactions to accurately assess tax liabilities on profits," said Rahul Sateeja, Partner, DMD Advocates.