Crypto Investing
29 Mar 2022

What is TDS, and How Does It Impact Crypto Transactions?

Ananda Banerjee

In addition to a flat 30% tax introduced on profit-making from the sale of cryptos, multi-virtual digital asset (VDA) offsetting restrictions being imposed, and the push for transparent tax declarations, the government has recently decided to apply a Tax Deducted at Source (TDS) of 1% to crypto transactions. With all this, crypto tax progression is probably the hottest topic in the country now, and there’s a lot to read and think about it.

While these developments suggest some legal recognition for the asset being taxed, the concept of TDS for cryptos remains hazy—owing to a lack of concrete examples, data-driven facts, and relevant information. But that changes today, as we try to understand everything about TDS against the current crypto landscape and user transactions.

Key Takeaways

  • TDS is an advance tax payment imposed by the government, with the aim of tracking money trails.
  • For every crypto sale, 1% TDS is to be deducted by the exchange.
  • Once the crypto profit tax liability is computed at the end of the year, you can adjust it with the TDS and get any extra tax money back, if your income is below the taxable threshold.
  • TDS provisions related to crypto will be implemented from 1 July 2022 onwards.

What is TDS?

Tax Deducted at Source (TDS) is an approach the Indian government takes to collect advance taxes and minimize evasions.

Every transaction involves a payer and a payee. Usually, if the taxable income exceeds a certain threshold, it is the payee’s responsibility to calculate the tax obligations—based on the slabs provided under the relevant taxation legislation—declare the same while filing, and pay up.

However, as payees tend to overlook tax liabilities frequently, the government instructs the payer to deduct the required amount (as mentioned in the slab) right at the source, with TDS as the tool. The payee can request a return if the overall TDS deducted throughout the year exceeds the tax obligations. To sum it up:

How does TDS work?

Here is a mathematical example to help you understand the concept of TDS better:
Imagine a person A(Payer) has to pay person B (Payee) ₹50,000 for a professional service. First, A must check for the threshold value of the tax concerned (that is, the amount below which no TDS is applicable). For professional services, the limit is ₹30,000 in India currently. Hence the entire sum of ₹50,000 falls under the purview of TDS in this case.

Now let’s assume A deducts 10%, or ₹5,000, thus sending the remaining ₹45,000 to B. A then visits the government’s official website, deposits the advance tax on behalf of B, submits PAN card details, and gets a receipt, which she/he then shares with B as proof of tax payment.

When B files his/her income tax returns at the end of the year, if the total annual income is below the taxable slab, he/she will have zero tax liabilities. In this case, a TDS return can be filed, and B will get a refund of ₹5,000, the amount that had been deducted through A.

Now that you are familiar with the concept of TDS in general, let us understand this from a crypto angle. 

TDS on Crypto: Everything you Need to Know

Crypto TDS highlights

The status of crypto in India was rather hazy until 2021 before the Union Budget recognized and added a tax slab pertaining to it. As of now, the 30% flat slab applies to all the crypto gains when you sell the assets and get the converted fiat money in your account. There is also a 1% TDS slab slapped on every transaction (sell-side), where it will be the responsibility of the crypto exchange to deduct the aforementioned amount once the user initiates sell.

In the case of crypto TDS, consider the exchange as the payer and the user as the payee. 

As far as the TDS implementation is concerned, every provision will take effect starting on 1 July 2022. 

Is there a threshold for the crypto TDS?

Every transaction type needs to have a threshold before it comes into the ambit of taxation (advance or self-assessment). Here is how the threshold for TDS and crypto works:

  • Yearly payments of up to ₹10,000 are made towards Virtual Digital Assets (VDA) by an individual.
  • Individuals who get their accounts audited or belong to what is known as a “Hindu Undivided Family” have to make yearly payments of up to ₹50,000 towards VDAs.

Please note that the income tax slab of 30% doesn’t come with any thresholds. Every profit you make is taxed, and the only cost of acquisition or deductible is the exchange fee.

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How does TDS in crypto work?

Here is an example that can help us understand how TDS works in crypto:

Under the threshold

Suppose a person, C, buys Bitcoin (BTC) worth ₹8,000. C then sells it after a month at a profit of 20%. The total value of the portfolio is now: ₹8,000 + 20% of ₹8000 = ₹9,600. In this case, after C gets the money credited to his/her account, no TDS is deducted as it falls under the ₹10,000 threshold.

Note: If the transaction value crosses ₹10,000 at any point during the financial year, TDS implementations will kick in—and will include the initial sum as well, which is ₹9,600 as per the example mentioned above. 

Above the threshold

Now imagine C selling the assets after six months with a massive 50% gain; the portfolio value would be ₹12,000. At this point, if C contemplates selling, the exchange will deduct 1% as advance tax, or TDS, and C would get: ₹12,000 – (1% of ₹12,000) = ₹11,880.

Note: Your 50% gains, i.e., profit worth ₹4,000, are still eligible for capital gains tax. Read this piece to know more about how it is calculated.

That said, it is important to remember that TDS will have to be paid each time a sale occurs. So if you make any other crypto purchase/s in the future, you will again need to pay the 1% TDS each time.

The tax applies regardless of the profit or loss, starting 1 July 2022. So in case you are at break even, too, the 1% will still be deducted. And while the example concerns crypto-to-fiat transactions, TDS rules also apply to crypto-to-crypto swaps.

Wallet-to-Wallet Transfers

The only exception is if you purchase a VDA at an exchange and transfer it to a wallet—like Metamask. In such cases, you need not shell out any TDS on that transaction.

Crypto TDS returns and offsets: Are they allowed?

In the long-term, TDS isn’t something you should be worried about. Since a flat tax of 30% is already being applied to crypto gains, you can always file for the TDS returns and get them adjusted against the final tax liability.

It is important to note that crypto TDS takes your entire generic tax liability into consideration; it is not only related to the crypto portfolio and simply ‘Advance Tax’. So if you do not make any crypto-related profits, you can file for a refund on the TDS deducted or adjust the TDS to pay off your tax liability from other income.

In the short term, keeping track of every transaction, TDS deduction, and advance tax settlement might be time-consuming, but there doesn’t seem to be any way around it.

Wrap-Up

Despite the crypto tax guidelines clearing the speculative air regarding the place of virtual digital assets in India, there is still a lot of confusion regarding TDS. Some believe that TDS at 1% might negatively impact regular crypto traders, whereas others believe that it is necessary to keep track of crypto transactions.

However, TDS implementation is still three months away, and we can only fully make sense of its actual effects (good or bad) after that. As for the capital gains taxation, the 1st of April is almost here, so we recommend you connect with tax advisors for additional assistance.

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Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.

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Ananda Banerjee

Content Writer

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