Crypto Gains Before FY23 Eligible For Tax Exemptions, Rules ITAT

Profits derived from the sale of cryptocurrency prior to April 1, 2022, will be taxable as capital gains, and taxpayers will be entitled to avail themselves of exemptions under the Income Tax Act against such profits, the Jodhpur bench of the Income Tax Appellate Tribunal has held.

The ITAT’s order stems from an appeal filed by Raunaq Prakash Jain, a resident of Bhilwara city in Rajasthan, against an order of income tax authorities.

In fiscal 2016, Jain bought Bitcoins worth Rs 5 lakh and sold them in fiscal 2021 for about Rs 6.7 crore. Thereafter, he claimed a deduction in his taxable salary by setting off about Rs 5 crore for the construction of a residential house. As a result, he declared his total income for fiscal 2021 as Rs 1.7 crore for taxation purposes.

Section 54F of the Act allows taxpayers to reduce their tax liability by reinvesting the proceeds from long-term capital gains into a new residential property.

Jain paid the 20% long-term capital gains tax on the Rs 1.7 crore and filed his income tax return accordingly.

The tax authorities did not agree with Jain’s computation and disallowed the exemption claimed by him under section 54F. As a result, the authorities included the entire Rs 6.7 crore under the head ‘income from other sources’ as opposed to long-term capital gains. This meant that the deduction claimed by Jain under section 54F was disallowed.

In an appeal before the ITAT, the tribunal conceded to Jain’s view of the matter and allowed him to claim the deduction under section 54F.

The ITAT held that Bitcoin, despite being a virtual asset, is still a capital asset, and therefore the gains from the sale of Bitcoin will be classified as capital gains and not 'income from other sources.'

The ITAT said that the amendment pertaining to the taxability of virtual digital assets introduced by the Finance Act 2022 is prospective in nature and would not be applicable to cases where profits have been booked prior to April 1, 2022.

As per the amendments introduced in the Finance Act 2022, gains from the transfer of virtual digital assets are taxed at a flat rate of 30%. It was also stated that no deductions will be allowed against the proceeds obtained from the transfer of such assets.

The ITAT's affirmation that gains from the sale of bitcoins should be treated under the 'capital gains' head stems from the contention that Bitcoin, although intangible, qualifies as a capital asset since it grants ownership rights and can be bought, sold, or transferred, said Sandeep Jhunjhunwala, M&A Tax Partner at Nangia Andersen.

The tribunal, according to Jhunjhunwala, clarified that the 2022 amendments did not change the fundamental nature of virtual digital assets, and as a result, Bitcoin could be considered a capital asset even before the official introduction of the amended regime.