The Income Tax Appellate Tribunal (ITAT) in Jodhpur, India, issued its order today explained taxation of cryptocurrency transactions conducted before the financial year (FY) 2022-2023. According to the ruling, profits from all such transactions will be treated as capital gains.

ITAT clarifies taxation of cryptocurrencies before 2022

In what is considered a landmark ruling for the Indian digital asset ecosystem, ITAT has declared that cryptocurrencies such as Bitcoin (BTC), Ethereum (ETH) and others were capital assets before April 1, 2022. As such, any profits made on their sale during the this should be classified as capital gains and not income from other sources.

For the uninitiated, India’s current taxation framework for virtual assets came into force on April 1, 2022, as part of the Virtual Digital Assets (VDA) regulations. These rules impose a flat tax rate of 30% on all cryptocurrency gains, without allowing taxpayers to offset losses with profits. Additionally, 1% withholding tax (TDS) is charged on each cryptocurrency transaction.

However, the ITAT decision provides some relief to India’s early adopters of cryptocurrencies as they will be subject to a lower tax rate than the flat rate of 30% imposed under the current framework. In particular, before April 1, 2022, short-term capital gains were taxed at 15% and long-term capital gains at 10%.

The ITAT decision came while hearing a case involving a person who bought BTC worth $6,478 in the 2015-16 financial year and sold it for $78,803 in the 2020-2021 financial year. The individual argued that the sale proceeds should be taxed as long-term capital gains because the asset was held for more than three years. However, the assessing tax officer disagreed, saying that digital assets, devoid of intrinsic value, cannot be classified as property.

However, ITAT rejected the tax office’s argument, stating that in accordance with Art. 2 section 14 of the Income Tax Act, cryptocurrency qualifies as property. The Tribunal clarified that “property of any kind held by the assessee”, including a right or claim in respect of an asset, meets the definition of capital assets.

Regulatory Gap in India for Digital Assets

Despite bragging highest cryptocurrency adoption rate globally, India continues to lag behind in creating a supportive regulatory framework for digital assets. As a result, many virtual asset companies have moved their headquarters to more cryptocurrency-friendly jurisdictions such as the United Arab Emirates and Singapore.

India’s high tax regime – 30% on profits and 1% TDS on transactions – has been a recurrent target of criticism. Last year, he was the CEO of digital asset exchange WazirX predicted that the current tax structure will remain unchanged for at least two years before any significant changes are made.

The Indian government does considering consulting with industry experts to shape a sustainable regulatory framework for cryptocurrencies. At press time, BTC is trading at $108,248, up 2.5% in the last 24 hours.

Featured image from Unsplash.com, chart from TradingView.com