Cryptocurrency taxation: The Income Tax Appellate Tribunal (ITAT) in Jodhpur has clarified the taxation of cryptocurrencies, ruling that profits from crypto sales should be considered as capital gains, rather than income. This decision is particularly important for transactions conducted prior to the government's definition of Virtual Digital Assets (VDAs) in 2022.
The ITAT's ruling establishes that cryptocurrencies should be regarded as assets, with profits from their sale categorized as capital gains, as opposed to income from alternate sources. This distinction is noteworthy as it provides guidance on the treatment of cryptocurrency profits, which was previously uncertain and had unclear direction on whether they should be classified as capital gains or categorized under the heading of "income from other sources".
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ITAT ruling
The ITAT ruling acknowledges cryptocurrencies as capital assets. Therefore, any profits derived from their sale prior to the 2022 regulations must be taxed as capital gains rather than income from alternate sources.
The recent ruling by the ITAT has clarified that cryptocurrencies such as Bitcoin, Ethereum, and other virtual digital assets (VDAs) are to be classified as capital assets. This categorization is significant as it dictates the tax implications regarding any profits generated from the buying and selling of these assets.
Prior to the implementation of the government's specific cryptocurrency tax regulations in 2022, profits derived from the sale of cryptocurrencies were treated as capital gains, similar to profits gained from selling real estate or stocks, rather than regular income.
As such, individuals who sold cryptocurrencies before 2022 and made a profit were required to report and pay tax on these profits as capital gains. Those who held onto their cryptocurrencies for over 3 years were eligible to declare them as long-term capital gains, potentially reducing the amount of tax owed.
Sandeep Jhunjhunwala, tax partner (M&A) at Nangia Andersen, said: “It not only recognises Bitcoin as a capital asset but also provides clarity on how such transactions should be treated for the period before the introduction of the formal VDA (virtual digital asset) regime in 2022.”
Capital Gains Tax Rate (Effective April 1, 2022)
As of April 1, 2022, the government has implemented new tax regulations specifically targeting profits generated from cryptocurrency transactions. Any gains acquired from buying and selling digital assets are subject to a flat tax rate of 30%. This tax is applicable to both short-term and long-term holdings, irrespective of the duration of the investment. It is important to note that any profit derived from cryptocurrency transactions after April 2022 will be taxed at a rate of 30%, regardless of the holding period.
What does this mean for investors?
Investors should be aware that profits from selling cryptocurrencies are liable for capital gains tax instead of higher income tax rates. This decision establishes the standard that cryptocurrency sales, particularly those occurring prior to the official regulations for virtual digital assets (VDAs) in 2022, should be viewed as transactions involving capital assets.
Guidelines for Crypto Investors
Pre-2022 Sales: If you realised profits prior to the implementation of the 2022 tax regulations, it is important to classify these profits as capital gains rather than income for tax purposes. It is essential to adhere to the capital gains tax rates in this scenario.
Post-2022 Sales: Any profits generated after April 1, 2022, will be subject to a fixed tax rate of 30%, with no allowances for deductions. It is crucial to be aware of this substantial tax rate.
Record Keeping: Crypto investors are required to maintain comprehensive records of their transactions, outlining the dates of purchase and sale, as well as the profits earned. This practice is essential for accurately calculating tax obligations.
The case
The tribunal has recommended that profits from cryptocurrency sales should be treated as long-term gains, and the assessment officer should assist individuals in claiming deduction benefits as stated in the law. A recent case heard by the ITAT involved an individual who purchased cryptocurrencies worth Rs 5.05 lakh in 2015-16 and subsequently sold them for Rs 6.69 crore in 2020-21. The individual argued that these gains should be classified as capital assets since the transaction occurred before regulations for virtual digital assets were implemented.