TDS on Crypto: Is the Govt. Charging ‘Additional’ Tax From July 1?

“Somehow, I had mentally prepared myself,” said Ranjana, “to pay 30 per cent tax on crypto gains even when I don’t make a lot out of it.”

“And now this additional 1 per cent TDS will cost me an arm and a leg. Why is the Govt. ‘looting’ everyone in the name of taxes and development?” Ranjana was dispirited.

In the Union Budget 2022, the Indian Govt. announced a 30 per cent tax on the profits earned from the transfer of Virtual Digital Assets (VDAs), including cryptocurrencies and NFTs.

Besides, 1 per cent TDS was also made applicable to trace crypto transactions and prevent tax evasion, which come into force from July 1, 2022.

Now, every crypto investor and a trader is asking the same question that Ranjana asked, “Why is the Govt. ‘looting’ everyone in the name of taxes?”

Is it true? Is the Govt. literally looting you by charging 30 per cent + 1 per cent additional tax on crypto? Or is there something else that needs our attention?

We’ll figure it out in this article.

Besides, I’ll also take you through TDS’ applicability to crypto and how it impacts you as a crypto investor or trader.?

Firstly, let’s look at the definition of a VDA according to the Income Tax Act.

What Is a VDA??

The Income Tax Act defines a Virtual Digital Asset as:

a) any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account including its use in any financial transaction or investment, but not limited to investment scheme; and can be transferred, stored or traded electronically;

(b) a non-fungible token or any other token of similar nature, by whatever name called;

(c) any other digital asset, as the Central Government may, by notification in the Official Gazette, specify.

In short, VDAs include cryptocurrencies and NFTs.

How Are Crypto Transactions Taxed in India?

Profits on crypto trades are taxed at 30 per cent plus surcharge and cess.?

Profits on crypto trades = Net Sale Value minus Cost of Acquisition

Here,

• Net Sale Value = Sale Value of Crypto minus GST, Exchange Fees, and Other Charges
• Cost of Acquisition = Purchase Value of Cryptocurrency

The cost of mining or any other cost, apart from buying cost, can’t be included in the cost of acquisition.

Furthermore, you can’t offset losses from transferring one VDA against the income from transferring another VDA. Even the carry forward of cryptocurrency losses is not allowed as per the Income Tax Act.

How Does TDS Apply to the Transfer of VDAs?

The buyer of a VDA has to deduct TDS at 1 per cent on the Net Sale Value paid to the seller.

Net Sale Value = Sale Value minus [GST+Exchange Fees+ Other Charges]

Is TDS in Addition to the 30 per Cent Tax?

TL;DR No.?

Look, here’s the thing.

TDS is a part of income tax. The Govt. imposes TDS to maintain the record of transactions.

Furthermore, while TDS applies to all transactions, irrespective of profit or loss, income tax is charged only on profit-making transactions.

When you file your income tax return, the TDS amount will be adjusted against your final tax liability.

You’ll get a tax refund if the TDS amount exceeds the final tax liability. On the contrary, you’ll have to pay additional tax and interest if the final tax liability is more than TDS.

Let’s take Komal’s example to understand this provision.

Komal performed 4 Bitcoin transactions during the financial year 22-23:

*Assuming that the sale value is after deduction of GST and exchange fees

In this case, loss from one order can be offset against the profit from another trade since it’s the same coin (BTC).?

If Komal had incurred a loss of ? 20,000 on BTC and earned gains of ? 26,000 from selling Dogecoin, she’ll have to pay a 30 per cent tax on ? 26,000, i.e. 7,800. But in this case, since it’s BTC, she’d have to pay a 30 per cent tax on ? 6,000.

TDS:

On each date, the exchange will deduct TDS at 1 per cent.

TDS amount = ? 550

Tax on crypto gains = 30 per cent of 6,000 = ? 1,800

The additional tax that Komal has to pay while filing her income tax return = ? 1,250

Case 2:

Suppose Komal carried only two transactions during FY 22-23.

Here total TDS deducted = 1 per cent of 13,000 = ? 130

Tax = 0

In this case, Komal will get a tax refund of ? 130. However, she will have to file her income tax return compulsorily to claim the tax refund.

Now, since your doubt about ‘additional’ tax is cleared, let’s look at other important aspects related to TDS’ applicability on crypto trades.

Who Is Liable To Deduct TDS?

In the case of crypto transactions, various scenarios are involved:

• In the case of a peer-to-peer transaction, i.e. where no broker or exchange is involved:?

The buyer will deduct TDS from the amount paid to the seller.

• In the case a person buys crypto via an exchange:

In such cases, the crypto exchange, such as WazirX, CoinDCX, etc., will deduct TDS on behalf of the buyer while paying the seller.

• In the case where the payment between the exchange and the seller is done through a broker (who is not the seller):

The broker will deduct TDS if a written agreement exists between the exchange and the broker.

• In the case where the exchange owns the VDA, and the buyer buys directly from the exchange:

Although it’s the buyer’s responsibility to deduct TDS, the exchange will pay the tax on its own.?The buyer won’t have to do anything additionally in this case.

• In the case where the buyer makes the payment in kind against the transfer of VDA:

The buyer will release the consideration in kind after the seller provides proof of payment of such tax.

What if One Crypto Coin Is Exchanged Against Another Crypto Coin?

In this case, the exchange will deduct TDS while paying the seller and the buyer.?

Let’s understand it with the help of an example.

Ruchita holds Dogecoin, and she wants to exchange it and buy Ethereum. On the other hand, Sonal holds Ethereum, and she wants to exchange it and buy Dogecoin.? Both Ruchita and Sonal want to execute the trade via WazirX.

In this case, Ruchita will have to sell Dogecoin and buy Ethereum, while Sonal will sell Ethereum and buy Dogecoin.

WazirX will deduct TDS in both cases - while paying the consideration to Ruchita for Dogecoin, and Sonal for Ethereum.

Will TDS Be Deducted in All the Cases??

The buyer or the Exchange won’t deduct TDS if they pay less than ? 10,000 on one trade or all trades executed during the financial year.

This limit will increase to ? 50,000, if the buyer is a specified person, i.e.

• An individual or HUF who doesn’t have any income under the head “profit and gains of business or profession”; And
• An individual or HUF whose total sales/ gross receipts/ turnover from business carried on by them is up to ? 1 crore or in case of the profession is up to ? 50 lakh rupees?

This threshold of ? 1 crore/ 50 lakhs will be checked for the financial year just preceding the financial year in which the VDA is transferred.?

What Will the TDS Rate Be if the Seller’s PAN Number Is Unavailable?

If the seller’s PAN is not available, the TDS rate will be 20 per cent.?

Further, if the seller hasn’t filed the income tax return for the past two years and a TDS of more than ? 50,000 was collected in each of the two years, then the TDS rate will be 5 per cent.

To avoid TDS deduction at a higher rate, ensure that you update your PAN on the crypto exchange. You should also file your income tax return compulsorily every year.

How To Ensure the Exchange or Buyer Has Deposited TDS With the Govt?

The exchange or buyer, whoever deducts TDS, will have to deposit it with the Govt. within 30 days from the end of the month in which TDS is deducted.

Then, within 15 days, the buyer or exchange will issue Form 16E (TDS Certificate) to the seller, which will contain the following main details:

• Seller’s Name and PAN
• Buyer/ Exchange’s Name and TAN
• Transaction Date
• Transaction Amount
• TDS Deducted
• TDS Deposited with the Govt.
• Section (194S)

It will ensure that the buyer or exchange has deposited accurate TDS against your PAN.

You can also download the Form 26AS statement from the Income Tax Website. It is an annual tax credit statement that contains information about TDS deducted by your clients, employer, banks, crypto exchanges, crypto buyers, etc.

Form 26AS statement confirms that TDS against your PAN number has been deposited with the Govt.?

Where are we heading towards?

By imposing TDS, the Govt. wants to hit two birds with one stone. Firstly, it wants to maintain a trail of all crypto transactions. On the other hand, it also wants to eliminate speculation by reducing trading.

The imposition of TDS will hamper liquidity for crypto traders and investors," says Srivar Harlalka, Co-Founder at Flippy. "The Govt. wants crypto investors in India to HODL and not trade. If investors don't sell, TDS won't come into the picture. Only active investors and traders have to account for TDS deduction every time they sell cryptocurrency."

Conclusion

There was much uncertainty around the applicability of TDS on crypto transactions until the Govt. issued a circular. By issuing a circular, the Govt. has cleared the uncertainty.?

Now, investors and experts expect the Govt. to reduce the TDS percentage to create a healthy and compliant ecosystem in India.?

What do you think of these tax provisions? Will they discourage investors and traders in India from dealing with cryptocurrency??

Let me know your thoughts in the comment section below.?