Bitcoin taxation:
Only Rs 33 lakh income tax liability on Rs 6.64 crore gain by selling Bitcoin for an Infosys employee, rules Jodhpur ITAT

Dec 20, 2024

Synopsis
Bitcoin is capital asset: Jodhpur ITAT recently ruled that an Infosys employee who purchased Bitcoin using his salary should pay capital gains tax at 20% rate and also claim section 54F tax exemption after he sold the Bitcoin for Rs 6.69 crore. The Income Tax Department wanted this person to pay 30% tax on that more than Rs 6 crore gains but lost the case. Curious to know why and which legal aspect this person used? Read below.

An ex-Infosys employee recently won a case against the income tax department when he sold his Bitcoin bought for Rs 5 lakh at Rs 6.69 crore. This case, which was heard at Jodhpur income tax appellate tribunal (ITAT) is a landmark case where it was decided that this person should be allowed to pay a lower rate of tax (20%) on his profit from sale of Bitcoin and also claim Rs 4.95 crore as income tax exemption under section 54F.

As a result of this ruling this individual taxpayer paid a lower tax of Rs 33 lakh (Rs 33,60,485) on the gains from sale of Bitcoin and also took tax exemption (54F) for a major chunk of the gains at the same time.

Curious to know how and which legal aspect helped this person secure this victory? Read below to find out.

How the Bitcoin tax problem started

This is the case of an individual from Bengaluru who worked at Infosys during FY 2015-16, when he purchased Rs 5 lakh worth of Bitcoin by using his salary. The source of the fund (salary from Infosys) for this purchase was critical in this case as it helped this person prove his intent to be investment and not speculative. This person sold Bitcoin for Rs 6.69 crore in FY 2020-21 and purchased a house. The problem arose when this person claimed tax exemption under section 54F (for using gains from sale of Bitcoin to buy a house) and paid 20% long term capital gains tax (LTCG) on this gain from sale of Bitcoin. The income tax department determined that this person should not get section 54F tax exemption and also pay 30% virtual digital asset (VDA) tax on Rs 6.69 crore and so sent a tax notice. The individual taxpayer filed an appeal against this tax notice at National Faceless Appeal Centre (NAFC), Delhi. At NAFC, Delhi this person lost the case, and the tax department won.

"Against that sale of Bitcoin, the assessee claimed indexed cost of purchase of Bitcoin for Rs 5,75,953 on purchase of Bitcoin, taken set off of losses from shares Rs 2,331 and claimed exemption u/s 54F of the Act amounting to Rs 4,95,68,910," said the person's Chartered Accountant before Jodhpur ITAT tribunal.

Since it was a question of interpretation of the law, Jodhpur ITAT allowed the person to file an appeal against the decision of NAFC, Delhi.

Jodhpur ITAT hears the facts of the case

Jodhpur ITAT scrutinised the law, its aspects, intention, spirit and also referred to similar cases. After a thorough look at the facts Jodhpur ITAT ruled that the cryptocurrency (Bitcoin) sold by this person is a capital asset. However, there is a catch which is that the crypto sale transaction must be before April 1, 2022, to be classified as a capital asset. If sold after this date, then crypto is a virtual digital asset and will accordingly be taxed. This ruling is significant because any asset which is treated as a capital asset is taxed under the capital gains (long term or short-term capital gains) heads of income. To recap, capital gains tax is levied typically at a lower rate than virtual digital asset (VDA) taxation rate.

According to the order of Jodhpur ITAT here's the legal aspects which were used to analyse this case:

Bitcoin investment was funded from Infosys' salary income hence its non-speculative nature

Jodhpur ITAT said: "Looking at the profile of the assessee we note that the only source of income of assesse is from salary, and he has invested his savings in shares / crypto currency. He is not regularly dealing in purchase/ sale of shares/ crypto currency. His intention is to hold for long term capital gain which is more evident from the fact that he made investment in crypto currency during FY 2015-16 which was sold in FY 2020-21 and the gain on sale of crypto currency is invested for purchase of house. This proves that the intention of the assessee in making investment in crypto currency is to hold it and to earn long term capital gain."

Bitcoin investments before 2022 are capital assets

Jodhpur ITAT said: "Though crypto currency / virtual digital asset is also not a currency, but it is not an asset within the meaning of section 2(14) of the Act. The amendment made in the Finance Act, 2022 has defined Virtual Digital Asset (VDA) u/s 2(47A) of the Act wherein the name given is of virtual digital assets. Thus, considering the plan vanilla meaning before the amendment as is to be understood at the time of purchase & sale of crypto currency (bitcoins) which is a right of the assessee attached to the investment made. Thus, all rights are property and thereby the right of the assessee in Bitcoin though a virtual asset is a capital asset. Therefore, in the present case the gain on sale of bitcoin which was acquired by the assessee during FY 2015-16 for Rs 5,05,155 and sold in FY 2020-21 for Rs 6,69,49,620 results into capital gain and not chargeable under the head income from other sources."

Budget 2022 clarified Bitcoin is a capital asset which will be taxed not as a capital asset

Jodhpur ITAT said: "We note that Finance Act, 2022 w.e.f. 01.04.2022, section 2(47A) has been inserted thereby the Virtual Digital Asset meaning was assigned and that includes the underlying assets Bitcoins. Thus, even the law maker has to clarify that virtual digital asset may be a capital asset and that assets to be treated as income to be taxed as special rate. The relevant amendment in the law is prospective as is evident from the memorandum explaining the budgetary provision……Since crypto currency is specifically incorporated in the statute as an asset, it means that even before 01.04.2022 it was an asset and therefore gain on sale of crypto currency has to be taxed under the head capital gain and not under the head income from other sources before the law maker made the specific provision in the Act."

Gains from Bitcoin can be reinvested to purchase a house and claim tax exemption under section 54F

Jodhpur ITAT noted that the fact of claiming tax exemption for capital gains invested in purchase of a house is linked to the fact that the gains are from capital assets. So, if Bitcoin is a capital asset till March 31, 2022, then gains from its sale is capital gains.

Jodhpur ITAT said: "As we have held that the income on sale of crypto currency is chargeable to tax under the head long term capital gain since assessee has held cryptocurrency for more than 36 months, therefore, AO is directed to allow claim of deduction u/s 54F of the Act to the assessee."

Key legal takeaways from this Bitcoin judgement by Jodhpur ITAT

ET Wealth Online has asked lawyers about the key legal takeaways from this case. Here's what they said:

ITAT rulings serve as reference

Faranaaz G. Karbhari, Counsel at HSA Advocates: ITAT rulings are applicable across India and carry significant weight in tax matters. They are binding on tax authorities within the jurisdiction where the ruling is delivered and can serve as persuasive precedents in other jurisdictions. Such rulings can influence decisions in higher courts, although they may not always be adhered to by the AO or Commissioner of Income Tax. If the tax department issues a notice, you can certainly rely on a relevant ITAT ruling to support your case, provided the facts are identical and the ruling has not been overruled by a higher court.

It is important to note that while ITAT rulings are generally accepted in courts of law, the final determination depends on higher judicial forums like the High Court or Supreme Court. For instance, you may quote the ITAT Jodhpur ruling as a strong persuasive precedent, particularly when dealing with a similar issue involving cryptocurrency taxation prior to the 2022 amendments. If the tax officer disputes your claim, you may rely on this ruling in appellate proceedings to defend the capital gains treatment and claim deductions under Section 54F.

Section 54F tax exemption can be claimed on sale of Bitcoin before April 1, 2022

SR Patnaik, Partner (Head - Taxation), Cyril Amarchand Mangaldas: Please note that the time period covered for the ITAT Jodhpur ruling was for the period from FY 2015-16 to the FY 2020-21 when the Income Tax Act, 1961 did not have any specific provision to deal with cryptocurrencies and bitcoins and people were treating the manner in which they deemed appropriate. However, “virtual digital asset” has been specially defined along with its taxability with effect from 1.4.2022. Thus, there is no doubt today regarding how virtual digital assets or cryptocurrencies or bitcoins shall be regarded while calculating the income and offering them for taxation purposes. The ITAT Jodhpur decision may be taken as a persuasive argument while determining the taxability of income prior to 1.4.2022, but not thereafter.

The ITAT Jodhpur decision may be taken as a persuasive argument while determining the taxability of income prior to 1.4.2022, but not thereafter. In the instant case decided by the ITAT Jodhpur, it appears that the taxpayer had shown the income as long term capital gains, which has a lower tax rate of 20%. Further, he was entitled to certain concessional tax treatment and accordingly, he had made investments and claimed exemption under section 54F of the Income Tax Act, 1961. We also understand that the taxpayer had some unabsorbed losses that were adjusted by him. Thus, as per the information available in the decision, his tax liability would be the following:
   

Source: Cyril Amarchand Mangaldas

Bitcoin is a property for taxation purposes

Tushar Kumar, Advocate, Supreme Court of India: The ITAT Jodhpur’s decision sets a remarkable precedent in Indian tax jurisprudence by affirmatively recognizing cryptocurrencies as capital assets under Section 2(14) of the Income Tax Act, 1961, for transactions undertaken prior to the enactment of the Finance Act, 2022. The Tribunal, employing a purposive interpretation, held that the definition of “property” under Section 2(14) is sufficiently expansive to encompass cryptocurrencies such as Bitcoin, provided they do not fall within the expressly excluded categories. This landmark ruling highlights the principle that taxpayers who hold cryptocurrencies for investment purposes, and meet the requisite holding period, are entitled to classify the gains as long-term capital gains (LTCG). It further emphasizes the prospective nature of the Finance Act, 2022, which introduced specific provisions for Virtual Digital Assets (VDAs), shielding transactions from its applicability prior to April 1, 2022. Significantly, the Tribunal reiterated the established judicial principle that, in cases of ambiguity, the interpretation favoring the taxpayer must prevail, as laid down by the Supreme Court in CIT v. Vegetable Products Ltd. This decision provides a robust foundation for similar claims, including deductions under Section 54F for reinvestment of cryptocurrency proceeds in residential property, thereby charting a clear path for the tax treatment of such assets in pre-amendment years.

Pallav Pradyumn Narang, Partner, CNK: The ITAT Jodhpur ruling sets a significant precedent by recognizing cryptocurrency as a capital asset for taxation purposes. The judgment implies that cryptocurrency qualifies as a capital asset under Section 2(14) of the Income Tax Act, even though it was not explicitly defined as such before the Finance Act, 2022. The ITAT's interpretation aligns cryptocurrency with the broader judicial understanding of "property," allowing taxpayers to treat crypto gains as capital gains rather than 'income from other sources.'

Gains from cryptocurrency held for more than 36 months qualify as long-term capital gains (LTCG). LTCG benefits, such as the concessional tax rate of 20% (with indexation) and eligibility for exemptions under Section 54F, are applicable. This strengthens the argument for treating crypto gains as capital gains for transactions before AY 2023-24. The ruling also allows taxpayers to claim Section 54F exemptions, which provide relief on LTCG if the net consideration from the sale of a capital asset (excluding residential property) is reinvested in residential property. This ruling can be cited to argue for capital gains exemptions on cryptocurrency gains before the effective date of the Finance Act, 2022.

The ruling clarifies that the Finance Act, 2022, including Section 115BBH, applies prospectively from AY 2023-24. Gains from cryptocurrency prior to 01.04.2022 should be taxed under the existing legal framework, which permits classification as capital gains. This reinforces the principle that new tax provisions imposing liabilities cannot be applied retrospectively unless explicitly stated. In summary, the ITAT Jodhpur ruling is a landmark interpretation for taxpayers engaging in cryptocurrency transactions prior to AY 2023-24, providing clarity on the treatment of crypto gains under the earlier tax framework.

Sandeep Jhunjhunwala, M&A and Tax Partner, Nangia Andersen: This is the first appellate ruling on taxation of crypto currencies in India. Although, juxtaposed in a time frame prior to introduction of the formal taxation regime for Virtual Digital Assets vide Finance Act, 2022, this ruling delivers some interesting principles, which could act as a guiding torch for crypto players who, prior to April 1, 2022 took tax positions on their crypto gains. The ITAT's affirmation that gains from sale of bitcoins should be considered as capital gains, stems from the principle that Bitcoin, although intangible, qualifies as a capital asset since it grants ownership rights and can be bought, sold, or transferred. The Tribunal further clarified that the amendments made by the Finance Act, 2022, did not alter the fundamental nature of VDAs, as assets. Thus, even before the formal introduction of the VDA regime, Bitcoin could be classified as a capital asset. In its ruling, the ITAT invoked the principle of interpreting tax laws in a manner favorable to taxpayers, a well-established judicial precedent in Indian tax jurisprudence. This ruling has significant implications for the treatment of cryptocurrency transactions under the Indian tax law. 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 regime in 2022. Further, the Tribunal's ruling aligns with the tax treatment of gains from crypto assets in the ITR under the VDA tax regime. In the ITR, income from VDAs is grouped under Schedule CG-Capital Gains, even after the introduction of the specific VDA taxation framework in the Finance Act, 2022. This could suggest that, retrospectively, gains from the sale of VDAs could have been taxed as Capital Gains instead of Income from other sources, as implied by the classification of VDAs under Schedule CG.

[The Economic Times]