Today, the Income Tax Appellate Tribunal (ITAT) located in Jodhpur, India, has provided clarification on how crypto transactions made before the financial year (FY) 2022-2023 are taxed. Based on this ruling, any profits from these transactions will now be classified as capital gains.
Clarification on Crypto Taxation Prior to 2022
This ruling is seen as significant for India’s digital asset landscape. The ITAT ruled that cryptocurrencies, including Bitcoin (BTC) and Ethereum (ETH), were recognized as capital assets prior to April 1, 2022. Thus, profits made from their sale before this date will be treated as capital gains rather than as income from other sources.
It’s important to note that India’s present virtual assets taxation model was implemented on April 1, 2022, under the new Virtual Digital Assets (VDA) regulations. These rules enforce a consistent tax rate of 30% on all crypto gains, not allowing deductions for losses. Additionally, there is a mandatory 1% tax deducted at source (TDS) on each crypto transaction.
The ITAT’s ruling provides a measure of relief to early cryptocurrency investors in India, as they will face a lower tax rate compared to the current flat rate of 30%. Specifically, before April 1, 2022, short-term capital gains were taxed at 15%, while long-term gains were taxed at 10%.
The tribunal’s ruling arose during a case concerning an individual who bought BTC for $6,478 in FY 2015-16 and later sold it for $78,803 in FY 2020-21. The individual contended that the sale proceeds should be taxed as long-term capital gains due to the asset being held for over three years. However, the assessing officer disagreed and argued that digital assets, lacking intrinsic value, should not be deemed property.
In response, the ITAT rejected the tax officer’s perspective, referencing Section 2(14) of the Income Tax Act, which recognizes cryptocurrency as property. The tribunal stated that “property of any kind held by an assessee,” including rights or claims over an asset, fits the definition of a capital asset.
Regulatory Challenges for Digital Assets in India
While India has one of the highest rates of crypto adoption globally, it has not yet established a robust regulatory framework for digital assets. This has led several virtual asset companies to move their operations to more crypto-friendly locations like the UAE or Singapore.
The steep tax strategy in India—30% on capital gains and 1% TDS on transactions—has faced considerable criticism. Last year, a former CEO of the WazirX exchange predicted that the current tax regime would remain unchanged for at least two more years before significant alterations might occur.
In light of these challenges, the Indian government is contemplating discussions with industry professionals to develop a more balanced regulatory framework for cryptocurrencies. Currently, BTC is trading at $108,248, reflecting a 2.5% increase in the past 24 hours.
