Treat Crypto Profit as Capital Gains: ITAT Clarifies Pre-2022 Taxation Rules

The Income Tax Appellate Tribunal (ITAT) in Jodhpur has delivered an important judgment on the issue of taxation of cryptocurrencies: profits from crypto transactions carried out before the formal regulation of Virtual Digital Assets (VDAs) in 2022 should be categorized as capital gains rather than income from other sources. This judgement clarifies a previously hazy tax situation regarding the earnings from cryptocurrencies.

The ITAT stated that Bitcoins, Ethereum, and other digital currencies are considered capital assets. This means that any profits made from selling them before the 2022 VDA tax rules came into effect will be taxed as capital gains. This is good news for investors because taxes on capital gains are usually lower and more favorable compared to profits taxed as “other income.”

Explanation on Pre-2022 Cryptocurrency Earnings

Prior to the Indian government’s specific taxation rules for VDAs, effective from April 1, 2022, the treatment of crypto profits lacked clear guidelines. Recently, the ITAT held that cryptocurrencies are akin to property or stocks, so the profits made from selling them before the 2022 tax rules will be treated as capital gains. In case a person had held the cryptocurrencies for more than three years before selling, they can get benefits like paying lesser taxes under long-term capital gains.

For instance, a person invested in cryptocurrencies in 2015-16 at Rs 5.05 lakh and sold at Rs 6.69 crore in 2020-21. According to this person, the gains made should be taxed as capital gains because the transaction took place prior to 2022 when the government released rules for digital assets. The ITAT reiterated this conclusion and directed tax authorities to guide these individuals to take advantage of the available exemptions and tax benefits under capital gains regimes.

Taxation Post-April 1, 2022

The landscape for cryptocurrency taxation changed dramatically in April 1, 2022, when the Government laid down a clear set of rules for taxing VDAs. According to it, any profit made from buying and selling currencies will be taxed at the flat rate of 30% irrespective of the length of time held. Any gain will be taxed regardless of whether it is earned as short-term or long-term. No other deducible expenses are allowed in this except the cost of acquisition itself.

Implications for Investors

This decision becomes a landmark clarification for the crypto investors, especially for those who sold their digital assets before the regulations of 2022. The decision by ITAT clearly holds that such profits will have to be classified as capital gains, which thereby reduces the possibility of the same being taxed at the higher income tax rates.

Important implications for investors include:

1. Transactions prior to 2022: Profits earned before April 1, 2022 are capital gains. Taxpayers can get benefits under long-term capital gains for example Deduction u/s 54F if they have held cryptocurrencies for a long time before selling.

2. After 2022: If cryptocurrencies are sold after April 1, 2022, the profits will be taxed at a flat rate of 30%. No other deductions are allowed except for the cost of buying them.

3. Record-Keeping Requirements: Investors must keep detailed records of their crypto transactions, which include dates of purchase and sale, and the corresponding profits. Proper documentation ensures accurate reporting and compliance with tax obligations.

The ruling is an important step forward in resolving uncertainties that have long existed surrounding the taxation of cryptocurrencies. This declares digital assets as capital assets and simplifies the tax treatment over transactions prior to the VDA regime. Investors are also advised to be more thoughtful about their cryptocurrency earnings by ensuring compliance with pre-and post-2022 provisions.