An ex-Infosys employee recently triumphed in a legal battle against the income tax department after selling his Bitcoin, which he purchased for Rs 5 lakh, for an impressive Rs 6.69 crore. This landmark case, deliberated at the Jodhpur Income Tax Appellate Tribunal (ITAT), concluded with a ruling that permitted this individual to pay a reduced tax rate of 20% on his profits from the Bitcoin sale, alongside claiming a tax exemption of Rs 4.95 crore under section 54F.

Thanks to this ruling, the taxpayer ended up paying a significantly lower tax amount of Rs 33 lakh (Rs 33,60,485) on his Bitcoin sale gains while simultaneously enjoying a tax exemption under section 54F for a substantial part of the profits.

Interested in the legal elements that contributed to this person’s victory? Read on for more details.

Origins of the Bitcoin Tax Dilemma

The case centers around an individual from Bengaluru who was employed at Infosys during the fiscal year 2015-16, during which he invested Rs 5 lakh in Bitcoin using his salary. The origin of funds (salary from Infosys) played a crucial role, helping establish his intention as an investor rather than a speculator. By the fiscal year 2020-21, he sold his Bitcoin for Rs 6.69 crore and then used the profits to purchase a home. However, complications arose when he sought a tax exemption under section 54F, which allows for deductions related to the sale of property when profits are reinvested in purchasing a house. Instead, the income tax department argued against the section 54F exemption and mandated a 30% tax on virtual digital assets (VDA) concerning the Rs 6.69 crore revenue. This prompted the taxpayer to appeal against the tax notice at the National Faceless Appeal Centre (NAFC) in Delhi, where he initially lost the case.

“In reference to the Bitcoin sale, the taxpayer claimed an indexed cost of acquisition at Rs 5,75,953, accounted for some set-off losses from share transactions amounting to Rs 2,331, and sought exemption under section 54F for a total of Rs 4,95,68,910,” explained the taxpayer’s Chartered Accountant during the tribunal process.

Due to the question of legal interpretation, the Jodhpur ITAT allowed the taxpayer to pursue an appeal against the NAFC’s decision.

Jodhpur ITAT Examines the Case

The Jodhpur ITAT closely analyzed the law, its intended effects, and related precedents. After a detailed review, the tribunal determined that the Bitcoin sold by the taxpayer qualifies as a capital asset. However, the stipulation is that the sale must occur before April 1, 2022, for it to be categorized as such. Transactions after this date will be classified as sales of virtual digital assets and will be taxed accordingly. This ruling is significant because assets recognized as capital assets are typically taxed at lower rates than those designated as virtual digital assets (VDA). To summarize, capital gains tax is usually lower than the tax rate on VDAs.

The order from the Jodhpur ITAT included several key legal points that were referenced in analyzing the case:

Bitcoin Funding Originates from Salary, Reinforcing Non-Speculative Nature

The Jodhpur ITAT noted, “Considering the profile of the taxpayer, we observe that his only income source is salary, and he has chosen to invest his savings in shares and cryptocurrencies. He is not a frequent trader in either shares or cryptocurrencies. His intention clearly leans toward long-term capital gains as evidenced by his investment in cryptocurrency during FY 2015-16, which he sold in FY 2020-21, subsequently investing the proceeds into a house. This asserts that the taxpayer’s goal with the cryptocurrency investment was to hold it with the expectation of substantial long-term capital gains.”

Bitcoin Purchases Prior to 2022 Classified as Capital Assets

The Jodhpur ITAT continued, stating, “Although cryptocurrencies and virtual digital assets do not fit the traditional definition of currency, they are not classified under section 2(14) of the Act as an asset. The update in the Finance Act, 2022 has categorized Virtual Digital Asset (VDA) under section 2(47A) of the Act, differentiating it from previous classifications. Given this context, prior to the amendment, the status of cryptocurrency at the point of purchase and sale becomes essential. Any rights attached to the investment imply that the rights connected to Bitcoin—despite it being a virtual asset—should be considered as a capital asset in this case. Accordingly, the gain from the sale of Bitcoin, acquired for Rs 5,05,155 in FY 2015-16 and sold for Rs 6,69,49,620 in FY 2020-21, is classified as a capital gain and should not be categorized under income from other sources.”

Budget 2022 Clarification on Bitcoin

The Jodhpur ITAT emphasized, “The Finance Act, 2022, effective from 01.04.2022, introduces section 2(47A), specifying the definition of virtual digital assets, which encompasses cryptocurrencies like Bitcoin. This clarification from the lawmakers indicates that virtual digital assets are viewed as capital assets that should be taxed at a distinct rate. The legal updates hold prospective implications as explained in the budgetary clarifications. Given that cryptocurrencies were already recognized as assets prior to 01.04.2022, gains from their sale must be taxed under capital gains and not considered income from other sources prior to implementing the specific provisions.”

Capital Gains from Bitcoin Can Fund House Purchases and Allow Tax Exemptions Under Section 54F

The ITAT noted that the ability to claim tax deductions for capital gains reinvested in purchasing a house is inherently linked to the characterization of those gains as derived from capital assets. Thus, if Bitcoin is acknowledged as a capital asset as of March 31, 2022, the profits made from its sale qualify as capital gains.

The tribunal asserted, “Having established that income from the sale of cryptocurrency is chargeable under long-term capital gains, as the taxpayer held the cryptocurrency for over 36 months, therefore, the Assessing Officer (AO) is mandated to approve the claim for deduction under section 54F of the Act for the taxpayer.”

Significant Legal Insights from the Jodhpur ITAT’s Ruling on Bitcoin

Experts have shared their insights regarding key takeaways from this case:

ITAT Judgments as Reliable References

Faranaaz G. Karbhari, Counsel at HSA Advocates: “ITAT decisions hold application across India and are influential in tax-related matters. They are binding on tax authorities within the jurisdiction of the ruling and may serve as persuasive precedents in other areas. Such decisions can impact conclusions in superior courts, although the Assessing Officer or the Commissioner of Income Tax may not always comply with them. When faced with a tax notice, you can reference a pertinent ITAT ruling as support, provided that facts are congruent and the judgment remains upheld by a higher court.”

It’s crucial to remember that, despite the general acceptance of ITAT decisions in legal forums, final outcomes depend upon higher judicial authorities like the High Court or Supreme Court. The ITAT’s ruling in Jodhpur can be positioned as a compelling persuasive precedent, especially when addressing cryptocurrency taxation issues that arose before the 2022 amendments. If a tax officer contests your position, you may leverage this ruling during appellate considerations to argue for capital gains treatment and request deductions under Section 54F.

Eligibility for Section 54F Tax Exemption on Bitcoin Sales Pre-April 1, 2022

SR Patnaik, Partner (Head – Taxation), Cyril Amarchand Mangaldas: “It’s noteworthy that the timeline relevant for the ITAT Jodhpur ruling encompassed FY 2015-16 to FY 2020-21, which fell before specific clauses pertaining to cryptocurrencies were integrated into the Income Tax Act, 1961. Individuals were left to handle taxation in a manner they saw fit. However, since the definition of ‘virtual digital asset’ is now clearly defined along with its related tax implications effective April 1, 2022, the approach to assessing the status of cryptocurrencies in income calculations is no longer ambiguous. The ITAT ruling can be referenced as an influential argument in determining the tax applicability of income earned before April 1, 2022, but not for subsequent periods.

In the case reviewed by ITAT Jodhpur, it appears the taxpayer presented the income as long-term capital gains, attracting a reduced tax rate of 20%, while also being eligible for certain favorable tax treatments as well as making claims for deductions under section 54F of the Income Tax Act, 1961. Notably, the taxpayer also carried forward some unabsorbed losses that were factored into his calculations. As gathered from the case’s conclusions, the taxpayer’s tax liabilities could be tabulated as follows:

Particulars

Value (in Rs)

Sale price of Bitcoin

6,69,49,620

Less: Indexed cost of acquisition

5,75,953

Long Term Capital Gains (LTCG)

6,63,73,667

Brought forward losses

2,331

Net Long Term Capital Gains

6,63,73,667

Less: Exemption under section 54F

4,95,68,910

Net Long Term Capital Gains (LTCG)

1,68,02,426

Tax Payable @20%

33,60,485