NEW DELHI: Cryptocurrencies are capital assets and any profits made on their sale prior to the 2022 rules laid down by the government should be considered capital gains and taxed accordingly, the Income Tax Appellate Tribunal (ITAT) has ruled.

The decision is significant as it recognizes virtual digital assets as capital assets, said experts. "It not only recognizes 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 (virtual digital asset) regime in 2022," said Sandeep Jhunjhunwala, tax partner (M&A) at Nangia Andersen.

Any income from the sale or transfer of virtual digital assets from April 1, 2022, onwards is taxable at the rate of 30%, plus surcharge and cess, following the government's latest notification.

The ITAT bench in Jodhpur, comprising S Seethalakshmi and Rathod Kamlesh Jayantbhai, held that cryptocurrency is "an asset and therefore gain on sale of cryptocurrency has to be taxed under the head 'capital gain' and not under the head 'income from other sources' before the lawmaker made the specific provision in the (Income Tax) Act".

Moreover, since income from the sale of cryptocurrencies is to be taxed in line with the provisions applicable to long-term capital gains (as the assessee held it for more than three years), the tribunal directed the assessment officer to allow the person the deduction benefits, as applicable under the law.

The ITAT was hearing a case where a person, who had bought cryptos worth? 5.05 lakh in 2015-16 and sold them in 2020-21 at? 6.69 crore, argued that these be treated as capital assets, as the transactions had taken place before the government defined virtual digital assets under the Income Tax Act.