Breaking Down TDS on Crypto.

With the recent announcements made by the Finance Minister, 1% TDS will be applicable on all crypto trades effective from 1st July 2022.

Before we begin to understand the 1% TDS applicability on crypto trades, let me explain what does TDS mean?

What is TDS?

TDS means Tax Deducted at Source i.e. the tax is deducted at the source of income before the time of Income Tax Return Filing. It aims at collecting tax from the source of income. TDS lowers the risk of Tax evasion as tax is deducted before the income is received by the person liable to pay tax on his income.

Two parties are involved –

  1. Deductor i.e the person making the payment of any specified nature
  2. Payee i.e the person receiving the payment from the deductor

The Deductor at the time of making the payment to the deductee deducts the amount of TDS, depending on the rates as per the Income Tax Act, 1961, and remits such amount of TDS to the Central Government as per the due dates.

The credit of such TDS deducted is reflected in the Form 26AS of the payee or the TDS certificate issued by the deductor and the payee is entitled to receive the credit of the TDS deducted.

What is TDS on Crypto?

The Finance Bill, 2022 introduced a new section i.e. 194S under the Income Tax Act, 1961. As per section 194S of the Income Tax Act, 1961 TDS at the rate of 1% will be levied on the payment of purchase consideration to a resident person, on the transfer of a virtual digital asset as defined in section 2(47A) of the Income Tax Act, 1961.

Any transfer of cryptocurrency or any other Virtual digital asset (VDA) will attract TDS at the rate of 1% from 1st July 2022.

While the meaning of Virtual digital asset (VDA) includes cryptocurrencies it also includes anything “generated through cryptographic means or otherwise” i.e. digital art, images, videos, text, music, and even virtual real estate and in-game items that can be bought and sold as NFTs and much more.

So whenever you sell or buy any crypto from Crypto exchanges, the crypto exchange facilitating such transaction will deduct and withhold 1% of the amount of the transaction as TDS and later remits it to the Government as per the due date for payment of TDS.

1% TDS as per the Finance Bill 2022 under section 194S will not be deducted if you have done crypto transactions whether buying or selling for a value less than Rs. 10,000.

TDS will be deducted on the complete sale or purchase amount and it will not be limited to only profits earned. TDS is deducted irrespective of profit or loss earned on your trade, it will be deducted under all circumstances.

Who will deduct the 1% TDS?

The Intimation from the Central Board of Direct Taxes (CBDT) directs the crypto exchanges to deduct the 1% TDS on all crypto buying or selling transactions.

In short buyers and sellers like you won’t have to do anything the crypto exchange through which you are transacting will handle the complete process and TDS statements will be shared with you by the respective crypto exchanges at periodic intervals of time.

How will the 1% TDS be calculated?

Let’s take an example, you sell ETH worth Rs. 5000 on 4th July 2022. 1% TDS will be calculated on Rs. 5000 (the sale amount) which will be Rs. 50. Now in the below example a sell order of Rs. 10,000 is being placed and TDS at 1% amounts to Rs. 100 (10000 x 1%) and total value that user will get back is Rs. 9880 [ Rs. 10000 (the sale amount) – Rs. 100 (TDS Amount) – Rs. 20 (0.2% transaction fees x total sale value) ]

Impact of 1% TDS on Investors

There are four situations that as an investor you will need to be aware of.

Situation 1 – Buying Crypto with INR

This is the only situation besides the trade value being less than Rs. 10,000 that will not attract any TDS.

Situation 2 – Buying Crypto with another Crypto

1% TDS will be attracted whenever an investor will buy crypto in exchange for another crypto, the investor will pay 1% TDS on the sale transaction of the crypto you are exchanging for another crypto asset. For example, if you were using 200 USDT to buy $200 worth of Solana, you will be required to pay 1% of 200 USDT, or about 2 USDT as the TDS.

Situation 3 – Selling Crypto for INR

1% TDS will be deducted from the sale value of the transaction. For example, if you are selling Bitcoin worth Rs. 5000 then TDS will be Rs. 50 i.e. 1% of Rs. 5000.

Situation 4 – Selling Crypto with Crypto

In this case, 1% TDS will be deducted from the value of the Crypto that you were selling. For example, if you were selling MATIC for USDT, TDS will be deducted at 1% of the value of MATIC in INR.

Things to keep in mind:

  1. Effective Date of TDS Applicability: 1% TDS will be levied on all trades from 1st July 2022. This TDS provision will also be applicable on all trade orders that were placed before 1st July 2022 but executed after the TDS applicability date.
  2. No TDS on Buyer: TDS will not be levied on any Virtual Digital Asset (VDA) purchased with INR but this does not include the re-selling of such VDA by the investor in INR, TDS will be applicable on the sale of any VDA in INR or against any other crypto asset.
  3. Is TDS applicable even after paying 30% tax? : The levy of 30% tax on profit/gains on crypto trades differs from 1% TDS applicability but both are mandatory.
  4. Mandatory: The levy of TDS is not optional and is mandatory in all crypto trades.
  5. TDS Credit: The credit of TDS can be availed by investors at the time of annual filing on Income Tax returns.
  6. TDS on trade value less than Rs. 10,000: TDS will not be applicable if the total value of trade done by the user is less than Rs.10,000.

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