Man invests Rs 5 lakh in Bitcoin, sees it grow 140 times; faces tax scrutiny, ITAT says this
October 6, 2026
A Rs 5 lakh Bitcoin investment grew to Rs 6.69 crore in five years. The tax department treated Rs 6.63 crore as income from other sources and rejected a Rs 4.96 crore Section 54F claim. The ITAT ruled in favour of the taxpayer.
A salaried professional invested around Rs 5 lakh in Bitcoin in 2015-16. Five years later, that investment had grown to nearly Rs 6.7 crore. When he sold the Bitcoin, he treated the gain as long-term capital gains and also claimed a deduction under Section 54F after investing in a residential house.
But, the Income Tax Department disagreed with his deduction claim.
The tax officer said Bitcoin was not a capital asset under the Income Tax Act at the time of the transaction. He therefore treated the gain of Rs 6.63 crore as income from other sources and denied the Section 54F deduction. The dispute eventually reached the Income Tax Appellate Tribunal, Jodhpur Bench.
In a significant ruling, the ITAT held that the gain from the sale of Bitcoin in this case was taxable as long-term capital gains. It also allowed the taxpayer’s claim for Section 54F deduction of nearly Rs 4.96 crore.
From Rs 5 lakh to Rs 6.69 crore
The taxpayer, Raunaq Prakash Jain, was a salaried individual. He had worked with IT companies including MindTree and Infosys. During FY 2015-16, he invested Rs 5,05,155 in Bitcoin from his regular income. The source of this investment was not disputed during the tax proceedings. He held the Bitcoin for more than three years.
In FY 2020-21, he sold the Bitcoin for Rs 6,69,49,620.
The taxpayer treated the Bitcoin as a capital asset and calculated the profit as a long-term capital gain. He claimed indexed cost of acquisition of Rs 5,75,953 and also took a set-off of Rs 2,331 towards losses from shares.
He then claimed a deduction of Rs 4,95,68,910 under Section 54F after investing in a residential property. After these claims, he offered the balance amount as long-term capital gain and paid tax at 20%.
The taxpayer had also declared total income of Rs 1.74 crore in his return for the assessment year 2021-22.
Why did the tax department object?
The taxpayer’s return was selected for complete scrutiny under Computer-Aided Scrutiny Selection (CASS). The reason for selection was the capital gains deduction claimed by him. During the assessment, the tax officer questioned how the taxpayer could treat Bitcoin as a capital asset and claim long-term capital gains treatment.
The key argument of the tax department was that Bitcoin was not specifically defined as an asset under Section 2 of the Income Tax Act for FY 2020-21. The tax officer also relied on the fact that the government introduced a specific legal framework for Virtual Digital Assets through the Finance Act, 2022.
According to the tax officer, since Bitcoin was not a capital asset under the law applicable at that time, its sale could not be treated as a transfer of a capital asset. The officer therefore proposed taxing the net gain of Rs 6,62,96,741 as income from other sources.
The Section 54F claim was also rejected because the deduction is available against eligible long-term capital gains and not income taxed under the head income from other sources.
Tax officer’s unusual argument on Bitcoin
The assessment order took a broad view of what should qualify as property. The tax officer argued that a capital asset first needed to qualify as property. According to the officer, Bitcoin did not have the characteristics of conventional property such as shares, bonds, land, gold or commodities.
The order observed that a person buying crypto essentially gets a right to sell it to another willing buyer and that its value is determined by what others are willing to pay. The officer also said that Bitcoin was not legal tender and was not a currency.
The assessment order ultimately concluded that Bitcoin did not qualify as a capital asset under Section 2 of the Act.
The officer then calculated the taxable amount as follows:
• Bitcoin sale consideration: Rs 6,69,49,620
• Cost of acquisition: Rs 5,05,155
• Related expenses: Rs 1,47,724
• Net gain taxed as income from other sources: Rs 6,62,96,741
Taxpayer argued Bitcoin was a capital asset
Jain challenged the tax department’s view. His argument was based on the definition of capital asset under Section 2 of the Income Tax Act. The provision defines a capital asset as “property of any kind held by an assessee”.
The taxpayer argued that the definition was broad and that Bitcoin was not included in the list of exclusions under Section 2. He also argued that the law introduced in 2022 to specifically define Virtual Digital Assets could not be applied retrospectively to an earlier transaction.
His Bitcoin was bought in FY 2015-16 and sold in FY 2020-21. The specific VDA taxation regime came later.
The taxpayer also pointed out that tax officers in two other cases involving crypto transactions had treated crypto gains as capital gains. One of those cases involved his father, Prakash Chand Jain.
The taxpayer argued that his intention was to hold Bitcoin as an investment and not to trade in it regularly.
The ITAT noted that he was primarily a salaried person and that he was not regularly dealing in shares or cryptocurrency. He had bought the Bitcoin in 2015-16 and sold it in 2020-21.
The tribunal also noted that the gains were invested in the purchase of a house.
According to CA Dr Suresh Surana, the ruling indicates that the absence of a specific VDA definition before AY 2023-24 did not automatically prevent Bitcoin from being treated as a capital asset. However, the tax treatment would depend on the facts, particularly whether it was held as an investment or traded as a business, he said.
What did ITAT say?
The Jodhpur Bench of the ITAT took a different view from the tax officer and the CIT Appeals. The tribunal examined the definition of capital asset under Section 2 of the Income Tax Act as it existed during the relevant period.
It noted that the definition covered “property of any kind held by an assessee”. The tribunal then focused on the rights attached to Bitcoin.
It said that even though Bitcoin is a virtual asset, the taxpayer had a right attached to the investment. The tribunal observed that this right could fall within the broad definition of property and therefore constitute a capital asset.
In a key finding, the tribunal said: “Thus all rights are property and thereby the right of the assessee in Bitcon though a virtual assets is a capital asset.”
The ITAT therefore rejected the tax department’s argument that Bitcoin could not be a capital asset merely because it was not a conventional physical asset.
Why the 2022 VDA law mattered
The Finance Act, 2022 introduced a specific framework for taxing Virtual Digital Assets. Among other things, it introduced Section 2, which defined Virtual Digital Assets, and Section 115BBH, which provided a special tax regime for income from transfer of VDAs.
The tribunal noted that this framework applied from April 1, 2022 and the special tax provision under Section 115BBH applied from assessment year 2023-24. The ITAT treated this change as prospective.
It noted that the government had introduced a new taxation scheme because virtual digital assets had gained popularity and crypto trading volumes had increased.
Under Section 115BBH, income from transfer of a VDA is taxed at 30%. The provision also restricts deductions other than the cost of acquisition and does not allow set-off or carry-forward of losses from VDA transfers.
The tribunal therefore held that the later VDA taxation regime could not be used to deny capital gains treatment to the taxpayer’s earlier Bitcoin transaction. The ITAT said the gain from the Bitcoin sale was taxable as capital gain and not as income from other sources.
CA Surana says that for crypto transactions completed before Section 115BBH came into force, the subsequent 30% VDA tax regime cannot simply be applied retrospectively. The tax treatment has to be examined under the law applicable to the relevant year, he added.
Section 54F deduction also allowed
The second major issue was the taxpayer’s claim under Section 54F. Since the tax officer had treated the Bitcoin gain as income from other sources, the Section 54F deduction had been rejected.
But once the ITAT held that the Bitcoin gain was a long-term capital gain, the Section 54F claim became relevant again. The tribunal noted that the Bitcoin had been held for more than 36 months.
It therefore directed the tax officer to allow the taxpayer’s claim for Rs 4,95,68,910 under Section 54F. This effectively meant that the taxpayer received relief on both key issues in the case. First, the Bitcoin gain was accepted as long-term capital gain. Second, the Section 54F deduction was allowed.
What does the ruling mean for crypto investors?
The ruling is important mainly because it deals with a period before India’s specific VDA tax regime came into force. It does not mean that all Bitcoin or crypto gains can automatically be taxed as long-term capital gains at 20%.
The case relates to a Bitcoin investment made in FY 2015-16 and sold in FY 2020-21. The specific VDA tax regime introduced later was not applicable to that transaction. The ITAT’s decision was based on the law applicable to the relevant assessment year.
This distinction is important for investors because the tax treatment of crypto transactions changed significantly from the financial years covered by the new VDA provisions.
Surana said that the Section 54F benefit in this case flowed from the ITAT first treating the Bitcoin as a capital asset and the gain as long-term capital gain. This should not be confused with the current VDA regime, where Section 115BBH does not permit such an exemption
A key lesson: timing of the crypto transaction matters
The case shows why the year in which a crypto transaction took place can be crucial for tax purposes. Jain bought Bitcoin in 2015-16 and sold it in 2020-21. At that time, the Income Tax Act did not have the specific VDA taxation framework that exists today. The Finance Act, 2022 later introduced a specific definition for VDA and a separate tax regime.
The ITAT’s order makes it clear that the later provisions could not simply be applied to the earlier transaction. The tribunal ultimately allowed both grounds raised by the taxpayer and allowed the appeal.
For crypto investors, the broader takeaway is simple: do not look only at the size of a crypto gain. The date of purchase, date of sale, holding period, nature of the transaction and tax rules applicable in that particular year can all affect the tax treatment.
The Raunaq Prakash Jain case is a good example of how a Rs 5 lakh Bitcoin investment, which eventually became worth Rs 6.69 crore, turned into a major tax dispute before finally getting relief from the ITAT.
Disclaimer: This story discusses an ITAT ruling concerning a Bitcoin transaction in FY 2020-21. Tax treatment of Virtual Digital Assets has changed since then. Investors should consult a qualified tax professional for their individual tax position.
[The Financial Express]
