Can profit from cryptocurrency sale be taxed as capital gains? A guide to crypto taxation

A Jodhpur bench of Income Tax Appellate Tribunal (ITAT) recently ordered that the gains on cryptocurrencies sold before 2022 will be treated as capital gains and not as income from other sources. 

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This is believed to hold a lot of significance as the capital gains (both short and long term) on cryptocurrencies sold after April 1, 2022 are taxed at 30 percent.

By treating long term capital gains (taxed at 20 percent), investors stand to save significantly. In this case, ITAT was involved in a case involving a person who bought cryptocurrencies worth ₹5.05 lakh in 2015-16 and sold them in 2020-21 for ₹6.69 crore, making a significant profit.

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This verdict is seen as good news for the taxpayers who sold their cryptocurrencies before 2022, and can therefore be spared from paying 30 percent income tax on gains.

Expert opinion

“This Judgement is favourable for taxpayers as it will not only bring parity in how a crypto-transaction should be taxed, but will also enable taxpayers to claim capital gains deduction u/s 54F,” says Pratibha Goyal, partner, PD Gupta & Company.

However, where it stands it means taxpayers do not need to shell out 30 percent tax on their gains when they hold these assets for 36 months or more.

Case I: Someone bought cryptos for ₹10 lakh in 2020 and sold them in 2021 for ₹15 lakh. So, the tax will be computed as per capital gain (taxed at 20 percent) and not as income under ‘other sources’.

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Case II: Some one bought cryptos for ₹10 lakh in 2022 and sold them in 2024 for ₹15 lakh. This will attract 30 percent tax since the sale in this case took place after the new legislation on virtual digital currencies (VDAs) came into force.

Case III: Some one has bought bitcoins worth ₹10 lakh in 2020 and sold them for ₹15 lakh in May 2022. This too will attract 30 percent tax since the sale took place after the new rule came into force.

However, some experts also believe that this ruling may get challenged since this can set a precedent for future orders.

“The Hon’ble Tribunal has placed reliance on the orders of the subordinate tax authorities to hold that income from sale of crypto assets / VDA prior to April 2022 should be taxed as capital gains. Also, factors such as volume and frequency of transactions, disclosure in books, etc would need to be evaluated to decide on taxability of income from sale of such VDAs. It is interesting to note that Finance Act 2022 has brought tax on income from sale of VDA at 30 per cent without classifying the same as income from business or capital gains or other sources and therefore there is a possibility that the tax authorities may challenge this ruling,” says Bhavin Shah, Partner, Tax and Regulatory Services, MSKB & Associates LLP.