ITAT Ruling: Cryptocurrencies Now Recognised as Capital Assets for Taxation

Posted On - 2 January, 2025 • By - Prithiviraj Senthil Nathan

Summary

In a landmark ruling, the Income Tax Appellate Tribunal (ITAT) of Jodhpur has recognized cryptocurrencies, including Bitcoin, as capital assets under the Income Tax Act. This judgment has significant implications for the taxation of profits arising from the sale of virtual assets like Bitcoin and Ethereum. The ruling clarifies that cryptocurrency transactions will now be subject to capital gains tax, as opposed to being taxed under the head “Income from Other Sources.” This decision comes after a protracted legal dispute, which offers investors greater clarity regarding their tax obligations for cryptocurrencies.

Case Timeline

  1. 2015-16: The taxpayer purchased Bitcoin worth ₹5.05 lakh.
  2. 2020-21: The taxpayer sold Bitcoin for ₹6.69 crore, resulting in long-term capital gains of ₹6.64 crore.
  3. 2021: The taxpayer filed the income tax return declaring the profits from Bitcoin as long-term capital gains (LTCG), and sought exemptions under Section 54F for reinvestment in residential property.
  4. 2021-22: The tax authorities began scrutinizing the return, questioning whether Bitcoin qualifies as a capital asset.
  5. ITAT Ruling (2024): The ITAT ruled in favour of the taxpayer, stating that cryptocurrencies qualify as capital assets and their profits should be taxed as capital gains.

Issue Raised

The primary issue in this case was whether Bitcoin and other cryptocurrencies can be classified as capital assets under the Income Tax Act. The tax authorities had contended that cryptocurrencies should not be treated as capital assets, and thus, gains from their sale should not be taxed as capital gains. The taxpayer, however, argued that Bitcoin qualifies as a capital asset, as it is a form of property held for investment purposes, similar to other assets like stocks and bonds.

Appellant’s Arguments

The taxpayer made the following key points in support of their argument:

  1. Cryptocurrency as Capital Asset: The appellant argued that Bitcoin, like other forms of property, falls under the broad definition of “capital asset” as per Section 2(14) of the Income Tax Act. The taxpayer highlighted that cryptocurrencies are held as investments with the expectation of profit, similar to shares or bonds, and therefore should be treated as capital assets.
  2. Long-Term Holding: The appellant emphasized that Bitcoin was held for over three years before its sale, thus qualifying the profits as long-term capital gains (LTCG) under Indian tax law, which provides favourable tax treatment for such gains.
  3. No Difference in Asset Nature: The appellant rejected the tax officer’s suggestion that Bitcoin’s intangible nature made it ineligible to be a capital asset. They noted that other intangible assets like shares, bonds, and trademarks are categorized as capital assets for tax purposes, suggesting that the same logic should apply to cryptocurrencies.
  4. Tax Treatment Consistency: The appellant sought consistent tax treatment, arguing that since cryptocurrencies function as an investment asset, it would be illogical to treat them differently from other similar assets for tax purposes.

Respondent’s Arguments (Tax Officer)

The tax officer raised several points in opposition to the appellant’s claim:

  1. Lack of Legal Recognition: The Tax Officer argued that cryptocurrency does not have a clear legal definition under Indian law and is not explicitly recognized as a capital asset. The officer contended that cryptocurrencies are not treated as currency or legal tender, and thus, their sale does not qualify as a capital gain.
  2. No Tangibility: The Tax Officer emphasized that a capital asset must be a tangible property, and since cryptocurrencies are intangible, they should not be classified as capital assets. The officer argued that cryptocurrency’s nature as a digital, intangible item makes it difficult to categorize under capital gains taxation.
  3. Taxation Under “Income from Other Sources”: The Tax Officer suggested that since cryptocurrency does not meet the criteria for being a capital asset, the proceeds from its sale should be taxed as “income from other sources.” This would subject the gains to higher tax rates, in contrast to the preferential treatment offered to long-term capital gains.

Judgment

The ITAT ruled in favour of the taxpayer, holding that cryptocurrencies are indeed capital assets under the Income Tax Act. The key points of the judgment are:

  1. Recognition of Cryptocurrencies as Capital Assets: The ITAT ruled that cryptocurrency falls within the definition of “capital assets” as per Section 2(14) of the Income Tax Act. The Tribunal noted that cryptocurrencies, though intangible, function as property and are held with the intention of making a profit, thus qualifying them as capital assets.
  2. Long-Term Capital Gains (LTCG): Since the taxpayer held the Bitcoin for more than three years before selling it, the Tribunal ruled that the gains from the sale of the Bitcoin should be taxed as long-term capital gains (LTCG). This treatment entitles the taxpayer to the favourable tax rates associated with LTCG, rather than the higher rates applied to ordinary income.
  3. Rejection of Intangibility Argument: The Tribunal rejected the tax officer’s argument that Bitcoin’s intangible nature disqualifies it as a capital asset. The ITAT pointed out that the Income Tax Act does not require capital assets to be tangible. Shares, bonds, and even intellectual property, all intangible assets, are considered capital assets, thus setting a precedent for cryptocurrencies.
  4. No Application of 2022 Amendment: The ITAT clarified that the recent amendments introduced by the Finance Act 2022, which specifically address the taxation of virtual digital assets (VDAs), do not apply to the current case. The taxpayer’s sale occurred before April 1, 2022, the date the new tax provisions for VDAs came into effect. Therefore, the gains from the sale of Bitcoin were subject to regular capital gains tax provisions, rather than the new special tax regime.
  5. Claim for Section 54F Exemption: The Tribunal upheld the appellant’s claim for an exemption under Section 54F, allowing the long-term capital gains to be reinvested in residential property. This provision allows taxpayers to claim tax exemptions if long-term capital gains are reinvested in certain assets, including residential property.

Analysis

The ITAT ruling has profound implications for cryptocurrency investors in India. By classifying cryptocurrencies as capital assets, the judgment aligns with international practices that recognize virtual assets as legitimate property. The ruling provides clarity to taxpayers, offering them an opportunity to benefit from capital gains tax treatment, which is typically more favourable than the higher tax rates applicable to income from other sources.

Impact on Cryptocurrency Investors: This ruling helps address the uncertainty surrounding the taxation of cryptocurrencies in India. Investors can now confidently file returns reflecting capital gains on their cryptocurrency sales, rather than worry about ambiguity or reclassification of their income as “other sources.” Moreover, the long-term capital gains tax treatment allows for potential tax savings, which is a positive outcome for investors.

Future Taxation of Cryptocurrencies: While the ITAT ruling is a significant step forward, cryptocurrency taxation in India remains an evolving area of law. In 2022, the Indian government introduced a special 30% tax on profits from the sale of cryptocurrencies and other virtual digital assets (VDAs), effective from April 1, 2022. This new tax treatment is likely to apply to future cryptocurrency transactions, meaning that for post-2022 transactions, the 30% tax rate will supersede the regular capital gains tax rules. The ITAT’s ruling thus has limited application to transactions occurring before the 2022 amendments.

Legal Precedents: The decision reinforces the principle that intangible assets can be treated as capital assets, in line with existing tax laws that categorize stocks, bonds, and intellectual property as such. This sets an important legal precedent for the treatment of digital assets like NFTs, which are also intangible but could now be treated similarly.

Conclusion

The ITAT ruling that cryptocurrencies like Bitcoin are capital assets for taxation purposes marks a pivotal moment in the legal landscape for virtual digital assets in India. This decision ensures that gains from the sale of cryptocurrencies will be taxed under capital gains tax provisions, offering investors a more favourable tax outcome than if they were classified under “income from other sources.” While this ruling applies to transactions occurring before 2022, it establishes a foundation for the future treatment of cryptocurrencies, aligning with global practices and offering clarity to taxpayers as they navigate India’s evolving cryptocurrency tax regime.

King Stubb & Kasiva,
Advocates & Attorneys

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