Crypto Gains Before FY23 Eligible for Tax Exemptions, Rules ITAT
Profits from cryptocurrency sales prior to April 1, 2022, will be subject to capital gains tax, allowing taxpayers to utilize exemptions under the Income Tax Act, according to a ruling by the Jodhpur bench of the Income Tax Appellate Tribunal (ITAT).
This decision was made in response to an appeal filed by Raunaq Prakash Jain, a resident of Bhilwara, Rajasthan, challenging an order from the income tax authorities.
In fiscal year 2016, Jain purchased Bitcoins for Rs 5 lakh and sold them in fiscal year 2021 for approximately Rs 6.7 crore. Jain then sought to claim a deduction on his taxable income by offsetting around Rs 5 crore for constructing a residential property, ultimately declaring his total income for fiscal 2021 at Rs 1.7 crore for tax purposes.
Under Section 54F of the Act, taxpayers can lessen their tax burden by reinvesting long-term capital gains into new residential properties.
Jain paid the 20% long-term capital gains tax on the Rs 1.7 crore and submitted his tax return accordingly.
However, the tax authorities disagreed with Jain’s calculations and denied his claimed exemption under Section 54F. Consequently, they categorized the entire Rs 6.7 crore as ‘income from other sources‘ instead of long-term capital gains, disallowing Jain’s deduction under Section 54F.
In his appeal to the ITAT, the tribunal sided with Jain, permitting him to claim the deduction under Section 54F.
The ITAT determined that Bitcoin, despite its virtual nature, qualifies as a capital asset. Therefore, any gains from Bitcoin sales are to be considered capital gains rather than ‘income from other sources.
The tribunal noted that the changes regarding the taxation of virtual digital assets, introduced by the Finance Act 2022, are prospective and do not apply to profits realized prior to April 1, 2022.
Following the amendments in the Finance Act 2022, gains from the transfer of virtual digital assets are taxed at a flat rate of 30%, with no deductions allowed from the proceeds of such transfers.
Sandeep Jhunjhunwala, M&A Tax Partner at Nangia Andersen, explained that the ITAT’s confirmation that Bitcoin gains fall under the ‘capital gains’ category reinforces the notion that Bitcoin, though intangible, is a capital asset that provides ownership rights and can be bought, sold, or transferred.
Jhunjhunwala added that the 2022 amendments did not alter the fundamental nature of virtual digital assets, thus allowing Bitcoin to be regarded as a capital asset even before the new tax regime officially took effect.