Introduction
In the case of Raunaq Prakash Jain v. Income-tax Officer[i], the Jodhpur Bench of the Income Tax Appellate Tribunal (‘ITAT’) addressed a pivotal issue regarding the taxation of cryptocurrency gains. The Tribunal ruled that gains from the sale of Bitcoin, a cryptocurrency held for over three years, should be taxed under capital gains rather than as income from other sources. This decision marks a significant interpretation of tax law concerning virtual digital assets (‘VDAs’). It reflects an evolving understanding of cryptocurrency within the legal framework, particularly in light of ongoing legislative reforms.
Brief Facts
The assessee, Raunaq Prakash Jain, is an individual and salaried employee who purchased Bitcoin during the financial year (‘FY’) 2015-16 for Rs. 5.05 lakhs and sold it in FY 2020-21 for Rs. 6.69 crores, declaring a long-term capital gain (‘LTCG’) of Rs. 6.69 crores in his tax returns. The source of investment was not disputed.
The assessee claimed an exemption under s. 54F of the Income-tax Act, 1961 (‘Act’), for reinvestment in property, amounting to Rs. 4.95 crores. Due to the claimed capital gains deduction, the case was selected for scrutiny through Computer Assisted Selective Scrutiny (CASS), leading to the issuance of notices under s. 143(2) of the Act. The assessee complied with these notices.
The assessing officer (‘AO’) contested that cryptocurrency was not a capital asset under s. 2(14) of the Act and therefore taxed it as income from other sources under s. 56. The assessee maintained that the transactions yielded LTCG, as evidenced by holding the Bitcoin for over three years, and further contended that based on s. 2(14)(a), it should be treated as a ‘capital asset’ by default, considering it as property of any kind, whether or not connected with his business or profession.
The Commissioner (Appeals) upheld the AO’s conclusions, asserting that cryptocurrencies were not classified as assets under s. 2(14) of the Act at the time of purchase and sale and denied deductions under s. 54F to the assessee. Aggrieved by the decision, the assessee appealed to the ITAT.
Issues
The judgment addressed the following questions:
Whether Bitcoin and other cryptocurrencies should be classified as capital assets under s. 2(14) of the Act prior to the amendments introduced by the Finance Act, 2022?
Whether proceeds from the sale of cryptocurrencies be taxed as capital gains rather than income from other sources?
Whether a deduction under s. 54F on LTCG declared on the sale of cryptocurrency can be denied by taxing such gains as income from other sources?
Held
The Tribunal ruled in favour of the assessee, holding that the gain on the sale of cryptocurrency (Bitcoin), even prior to the assessment year (‘AY’) 2022-23, is chargeable to tax as capital gain and not as income from other sources under s. 2(47) of the Act. Reiterating principles of statutory interpretation in tax jurisprudence, as stated in Chief Commissioner of CGST v. M/s Safari Retreats Pvt. Ltd.[ii], the Tribunal remarked that ordinarily, whenever there are two possible interpretations of a statutory provision, the one that favours the taxpayer will be upheld.
The Tribunal held that a plain meaning interpretation of capital assets as defined under s. 2(14) implies that all rights are property; thus, the assessee’s right in Bitcoin qualifies as a capital asset. It was observed that a person is not required to own tangible property; even a right or claim on a property qualifies as a capital asset under s. 2(14) of the Act.
It was further held that although s. 2(47A) was inserted by amendment through the Finance Act, 2022, with the prospective application, a perusal of s. 45(1) affirms that gains arising from the transfer of capital assets shall be chargeable to tax as capital gains. Since cryptocurrency was specifically incorporated in the statute as an asset, it implies it was an asset even before this amendment. The profile of the assessee as a salaried person with no other source of income and his intention behind investment were also taken into consideration.
The Tribunal also observed that since gains from the sale of cryptocurrencies are to be charged under capital gains and not as income from other sources, and since the assessee held his investment in cryptocurrencies for more than 36 months, his claim for deduction under s. 54F shall be allowed.
Our Analysis
This decision has significant implications for future tax cases involving VDAs. While it marks a progressive step for India’s tax jurisprudence and digital asset investments, it also necessitates careful consideration of regulatory measures to mitigate associated risks.
Firstly, it establishes a precedent that gains from selling cryptocurrencies held for substantial periods should be classified as LTCG rather than income from other sources. This interpretation aligns with classifying cryptocurrencies as capital assets even prior to express definitions introduced by the Finance Act, 2022. Additionally, this ruling reiterates limitations on judicial overreach in interpretation concerning tax jurisprudence and emphasizes legislative intent and taxpayer rights in these cases. It brings clarity and consistency in tax treatment, reinforcing a more favourable environment for taxpayers engaged in digital asset transactions.
The recognition of cryptocurrencies as capital assets also has broader economic implications. As more individuals invest in VDAs, there may be an increase in capital inflows into the economy, potentially stimulating growth and innovation within the fintech sector. By recognizing LTCG, this ruling incentivizes individuals to hold VDAs rather than engage in short-term trading or day trading, potentially stabilizing the market.
However, while promoting legitimate digital investments is desirable, considerable exposure to potential risks such as money laundering cannot be ignored. Therefore, establishing a robust regulatory framework is essential to prevent such risks and preserve financial integrity in digital asset investments.
End Points
[i] [2024] 169 taxmann.com 298 (Jodhpur - Trib.).
[ii] Chief Commissioner of CGST v. M/s Safari Retreats Pvt. Ltd. 2024 SCC OnLine SC 2691.
Authored by Shivangi Bhardwaj, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.