Bitcoin and NFT Taxation: What You Need to Know About Taxes When Investing in Cryptocurrencies

Are you invested in cryptocurrencies like Bitcoin, Ethereum, or Dogecoin? Wondering how you’ll be taxed when buying or selling? Well, recent clarifications from the Income Tax Appellate Tribunal (ITAT) shed some light on the matter. The ITAT ruled that profits from selling cryptocurrencies should be considered capital gains rather than regular income. This ruling offers much-needed clarity on how cryptocurrency profits are taxed.

When it comes to holding onto your cryptocurrencies for the long term in a wallet, there’s no tax implications to worry about. However, if you sell them for a profit, you’ll need to factor in the capital gains tax. A recent case involving a former Infosys employee who invested in Bitcoin highlighted this issue. The individual invested Rs 5 lakh in Bitcoin back in FY 2015-16 using salary funds. When the cryptocurrency was sold for Rs 6.69 crore in FY 2020-21, the gains were reinvested in a house purchase.

Initially, the Income Tax Department wanted to tax the gains at a 30% rate under the Virtual Digital Asset (VDA) tax regime. But the ITAT sided with the taxpayer, recognizing that the Bitcoin transaction took place before cryptocurrencies were specified as VDAs. Instead, the gains were classified as long-term capital gains (LTCG) and taxed at a reduced rate of 20%. This not only saved the taxpayer money but also allowed for a significant exemption under Section 54F of the Income Tax Act for the house purchase.

So, if you’re venturing into the world of cryptocurrencies, it’s essential to understand how profits from buying and selling them are taxed. Keeping up with the latest rulings and regulations can help you navigate the tax implications of your crypto investments more effectively.