Crypto Beginner

Understanding Crypto TDS: A Comprehensive Tax Compliance Guide

tds on crypto

Key Takeaways

  • 1% crypto TDS is applicable on all sell-side transactions.
  • For VDA-VDA swaps and transfers, 2% TDS is applicable.
  • The TDS on crypto is meant to track crypto transactions and is quite different from capital gains tax.

We all know about the annual tax filing routine, but one kind of taxation is not discussed as often as it ought to be—Tax Deducted at Source or TDS, a type of advance tax.

It is important to be very clear about your tax liabilities before you make any financial commitments. So if you have even the smallest doubt about what TDS is, how it applies to crypto investments (as per the Finance Act, 2022), or how it is calculated, it may be a good idea to read this article.

What is TDS?

Unlike the taxes we file at the end of every year, Tax Deducted at Source or TDS is a tax filed in advance. Any payment made or received under the Income Tax Act of 1961 during a financial year will attract TDS.

TDS may be applied to salaries, rents, commissions, interest earned, dividends, professional fees, and other income-generating sources. The employer/payer is tasked with deducting the amount taxable under TDS and depositing it with the Income Tax (IT) department.

But why do we need TDS when yearly ITR filings exist? Here’s why: TDS isn’t simply a tax form. It is the government’s way of tracing every official payment to minimize year-end tax evasions. Simply put, TDS is a way of establishing a money trail.

TDS rates usually vary, depending on the income and age bracket. And as TDS is charged in advance, you can always adjust it with your yearly tax liability. You might get a tax refund if you show that you have a lesser tax liability than the sum of deducted TDS.

While TDS applies in a wide range of cases, we are limiting our scope to the crypto realm for this article.

What is 1% TDS on crypto assets?

TDS on Crypto in India was implemented on 1 July 2022. It was a kind of primer on how VDAs should be taxed, at least initially.

To be precise, a flat rate of 1% TDS currently applies to crypto assets—Virtual Digital Assets (VDAs). A 1% tax applies to every sell-side crypto transaction—profit or loss notwithstanding. That’s what TDS on Crypto means.

Let’s look at an example to understand this better.

If you buy crypto at any exchange, no TDS will apply. Say you want to purchase Bitcoin worth ₹12,000. You would get BTC worth the entire ₹12,000, based on the current INR–BTC rate. However, when you sell the BTC, expect 1% TDS to go out before it is credited to your account. It does not matter whether you sell it for ₹13,000 (at a ₹1,000 profit) or ₹8,000 (at a loss).

The point of the rule is to help track every VDA transaction and is a step toward implementing nationwide crypto regulations.

How will the 1% TDS on crypto transactions work?

There are some exceptions to keep in mind for the 1% TDS rule. The tax rate may differ in certain circumstances.

1. Annual trading value under ₹10,000: It is important to note that the crypto TDS isn’t applicable if the total value of the trades does not exceed ₹10,000 in a year. So you need to check the cumulative value of your trades every year to ensure your taxes are on track.

2. Low liquidity: The 1% TDS rule applies only to standard VDAs with adequate liquidity (adequate seller and buyer volumes). For illiquid cryptos (not easily tradable cryptos), exchanges will levy 2% TDS (1% + 1%) on transactions.

3. VDA-VDA swaps: The tax liabilities will again differ when it’s not just VDA on offer. For instance, if you plan on procuring one VDA (crypto) by purchasing or swapping it with another, the transaction is expected to be taxed in two sprints—at 2% TDS. That’s because, in a VDA transfer—as opposed to a VDA sale—the 1% implementation applies separately to each step.

How does the 1% TDS crypto calculation work?

The exchange you are dealing with will usually do the math for you, but they are supposed to offer the following documents for your reference in case you want to double-check:

  1. Transaction invoice highlighting the TDS breakup
  2. Document with exchange fee breakup
  3. Quarterly Form 16A certificate for improved tax management
  4. Invoice generated within 48 hours from when the sell trade is executed

With the most reliable exchanges, like CoinSwitch, you may not even need to verify the details, but you should know how the TDS calculation works.

An example should help simplify things. Imagine you have 20 tokens for a specific asset. You think the current sell price of each token, ₹500, is good enough, so you decide to sell. So the price you fetch is ₹10,000 (20 x ₹500).

Now, before you conclude that if 1% TDS applies to that ₹10,000, you will have to pay a tax of ₹100, remember you still have to cough up an exchange fee, service charges, and GST for the transaction. Say, for a random exchange, these fees amount to X.

So the final sum that reflects in your account is ₹10,000 – X – ₹100.

How is 1% TDS different from the 30% gains tax?

The main similarity between 1% crypto TDS and the 30% tax on VDAs is that both apply to tax Indian crypto users. But the two kinds of taxes are very different in the larger scheme of things. Here is a table highlighting some of the prominent differences between the two:

 TDSGains Tax
TimelineAdvance tax.Filed periodically by the end of each year.
Nature of TaxationApplies regardless of profit and loss.Applies only to profits.
OffsetsAdjusted against the overall tax liability while filing returns.No offsets are allowed. If you have profited from crypto sales, you need to pay.
Primary PurposeHelps trail crypto transactions.Helps tax crypto gains.

Conclusion

That’s pretty much all you need to know about crypto TDS and its implementation for now. However, you should know that the government is constantly looking at the crypto space and could come up with new TDS and capital gains taxes when necessary. Until then, all you need to do is adhere to the guidelines while sticking to a dependable DYOR strategy.

And yes, you can always HODL. That way, you would not have to pay TDS or capital gains taxes, at least for a while.

FAQs

What are the TDS rules on cryptocurrency?

To guarantee that all cryptocurrency transactions are recorded, there is a 1% TDS on crypto transactions amounting to Rs 50,000 in a fiscal year. This is applicable as per clause 194S on transactions carried out on or after July 1, 2022.

Can you claim 1% TDS on crypto?

Yes, one can claim a refund on the 1% TDS on crypto while filing ITR only if the Income Tax for the year is less than the TDS paid from crypto trading.

Is TDS on crypto refundable?

Indian investors who have already paid a 30% tax on their gains from crypto transactions are liable to pay TDS. These two tax liabilities need to be settled individually. However, if the tax owed is less than the tax deducted, investors can claim the difference between the two as a refund when filing the tax return.

Who will deduct 1% TDS, investor or crypto exchange?

According to the Central Board of Direct Taxes, the exchange itself can deduct the 1% TDS on the net sale transaction and pay it to the government directly.

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