Crypto to be Taxed as Capital Gains for Transactions Prior 2022: ITAT The bench, comprising S Seethalakshmi and Rathod Kamlesh Jayantbhai, directed that LTCG benefits be applied, as the assets were held for more than three years

The Income Tax Appellate Tribunal (ITAT) in Jodhpur, in a landmark judgement, has clarified the tax treatment of cryptocurrencies in India. The ruling states that profits from cryptocurrency sales should be regarded as capital gains rather than income. The decision is critical for transactions carried out prior to the introduction of the Virtual Digital Asset (VDA) in 2022.

ITAT's decision now classifies crypto, including Bitcoin, as capital assets, setting to rest the ambiguity that previously surrounded crypto taxation. The decision will be beneficial for investors holding crypto assets for over three years. Such investors will benefit from long-term capital gains (LTCG) tax rates in the form of deductions or exemptions, which usually results in lower tax liabilities.

This comes as a relief for individuals who sold cryptocurrencies before 2022.

The ruling is derived from a case involving an individual purchase of cryptocurrencies worth INR 5.05 lakh in 2015-16 and its sale for INR 6.69 crore in 2020-21. The appellant argued that due to the holding period exceeding three years, the gains from the sale should be treated as long-term capital gains.

The bench, comprising S Seethalakshmi and Rathod Kamlesh Jayantbhai, directed that LTCG benefits be applied, as the assets were held for more than three years.

The tribunal also clarified that the assessing officer was incorrect in holding that in order to qualify as a capital asset one should own something as property in as much as even if a person has a right or claim on a property it is also a capital asset u/s 2(14) of the Act.

"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.

Taxations before and after 2022

Pre-2022 transactions saw profits from crypto sales being categorised as capital gains, like profits from stocks or real estate. Investors holding crypto assets for over three years could classify their gains as LTCG, resulting in lower taxes. The tribunal ruling confirms this.

In February 2022, Indian Finance Minister Nirmala Sitharaman announced plans to introduce a 30 per cent tax on any form of income made on cryptos, with no deductions or exemptions. Wef April 1, 2022, under this regime, the tax rate was applicable for all, irrespective of the duration of asset holding.

"This decision brings much-needed clarity to the crypto market in India. By recognising crypto as capital assets, it aligns its taxation with traditional investments like stocks, offering relief to investors who sold crypto before 2022," said Edul Patel, Co-founder and CEO, Mudrex.

At present, the cryptocurrency m-cap stands at over USD three trillion, with India having over 19 million cryptocurrency investors as of December 2023.