What the 1% TDS on crypto assets means for you

With the one per cent tax-deductible source (TDS) rule for cryptocurrency transactions coming into effect from July 1, volumes on Indian crypto exchanges have dropped over 70% in the last four days. In early April, trading volumes on cryptocurrency exchanges were down 30-70% after the 30% tax on crypto profits took effect. India is also considering levying a 28 per cent goods and sales tax (GST) on crypto.

What is this TDS

According to the rules, it is mandatory for the buyer of a virtual digital asset to deduct 1 per cent of the amount paid to the seller (Indian resident). The TDS came into force on July 1 for transactions more than Rs 10,000. Hence, if an Indian citizen is selling assets like Bitcoin, Ethereum, Tether, BNB, Shibu Inu, Solana, Dogecoin etc, he/she will receive 1% less the value of its assets at the selling price.“The new section mandates a person, who is responsible for paying to any resident any sum by way of consideration for the transfer of a virtual digital asset (VDA), to deduct an amount equal to 1 per cent of such sum as income tax thereon. The tax deduction is required to be made at the time of credit of such sum to the account of the resident or at the time of payment, whichever is earlier,” said the Central Board of Direct Taxed in a notice dated June 22.

The liability to deduct tax under Section 194S of the Act applies only when the value or aggregate value of the consideration for transfer of VDA exceeds Rs 50,000 during the financial year in case of consideration being paid by the specified person and Rs 10,000 in other cases.

How will it be deducted?

First, the TDS collected needs to be paid to the Income Tax Department in INR. For this, any TDS collected in the form of Crypto has to be converted to INR. For ease of conversion and to reduce price slippage, in Crypto to Crypto transactions, the TDS for both sides would be deducted in the quote (or primary) Crypto asset.

WazirX markets have four quote assets- INR, USDT, BTC, and WRX. For example, in the following markets: MATIC-BTC, ETH-BTC, and ADA-BTC, BTC is the quote Crypto asset, and hence the TDS of both the buyer and seller trading in these markets would be deducted in BTC,” said Rajagopal Menon, vice president at crypto trading platform WazirX.

For example:

INR markets: 1 BTC traded for Rs 100. After TDS, the BTC seller receives Rs 99 and the BTC buyer receives 1 BTC (no TDS deducted)

Crypto-Crypto markets

1 BTC sold for 10 ETH. BTC seller receives 10 ETH by paying 1.01 BTC (after 1% TDS addition). BTC buyer receives 0.99 BTC (after 1% TDS deduction)

In a blog dated June 24, CoinSwitch gave an example. Imagine you need to sell 10 tokens (Name the entity as A). The selling price of each token currently stands at Rs 20 (Entity B). Commission and service charge at CoinSwitch, including discount, exchange fee, and GST (Entity D), let’s say is Re 1. The total token sale value = A x B: 10 x Rs 20 = ₹200 (Entity C). Meanwhile, the net sale would be = C – D = Rs 200 – Rs 1 = ₹199. Then, TDS will play the role in the token sale sum (i.e. 1% of Rs 199, or Rs 1.99) (Entity E). That said, the final sum would reflect in your CoinSwitch account = C – D – E = 200-1-1.99 = Rs 197.01.

TDS will be deducted, irrespective of the income tax basic exemptions. However, you can claim a refund if your total tax liability is zero or lower than what you have already paid in the form of TDS while filing your annual income tax returns. Moreover, TDS is applicable to sell transactions. The trading platform you use will deduct this amount and remit it to the tax authorities on your behalf. TDS will not be applicable on buy transactions in most cases.

How is TDS deducted in the case of an NFT?

In the case of an NFT, Sellers in India who transact either in cryptocurrency or in fiat currency (to earn from selling their VDAs) will be charged 1% TDS on the transaction amount.

For example:

NFT Sale Price = $100 (A)‍Artist Fee = 5% (B) & Service Fee (Incl. GST) = 2.95% (C)‍Net Sale Amount = (A) – (B) – (C) = $100 – $5 – $2.95 = $92.051% TDS will be applicable on the net sale amount i.e. 1% of $92.05 = $0.92 (D)‍The actual amount deposited to the user’s jump.trade wallet will be: (A) – (B) – (C) – (D)= $100 – $5 – $2.95- $0.92 = $91.13″Jump. Trade will remit any amount collected as TDS at the time of trade execution with the tax authorities on behalf of the user. Details of TDS from various sources of income can be viewed on your Form 26AS statement. This amount can be adjusted against your gross tax liability at the time of filing the income tax return,” explained Kameshwaran Elangovan, Co-Founder & Chief Operating Officer at GuardianLink.

What does this mean for an investor?

This would mean that investors would lose 1 per cent on every trade. While any TDS amount above taxes due would ultimately be refunded, it would have a crippling effect on the capital for day traders and short-term investors.”Day traders will definitely feel the pinch because even the 1% TDS on each transaction will add up to quite a big figure at the end of the month, eating into their working capital margin. The threshold for TDS is quite low which may lead to traders avoiding selling their holding until completely necessary. Overall, it is expected that trade volumes would reduce on account of these factors,” said Ankit Jain, Partner, Ved Jain & Associates.“The Government has introduced 1% TDS on every trade of crypto in order to track transactions and arrest tax evasion. On account of the imposition of TDS from July 1, the spot/intra-day trading volume on crypto exchanges has declined to over 70-75% compared to the volume traded in June. The key stakeholders have expressed their concern as the current rate of TDS will reduce the capital available to the traders as TDS is made applicable on every single trade. Even though the TDS will be refunded as the applicable law, the capital being held on account of this deduction will have severe ramifications on the spot/intra-day trading of crypto. However, the actual impact of this imposition is yet to be tested in times to come and it is expected that this move will boost the confidence of investors looking to enter the crypto market,” said Ashutosh K. Srivastava, Senior Associate, SKV Law Offices. According to Jain, the introduction of TDS on cryptocurrencies would increase the cash requirement for crypto traders since one every transaction a small amount would be reduced from the cash available for the trading.

How is TDS different from 30% gains tax?

TDS is a tax withheld at the source at the point of the transaction itself. This tax can be adjusted against your total tax liability. TDS under Section 194S would be deducted by the buyer at the time of remittance of consideration to the seller. For the transfer of virtual digital assets (cryptos, NFTs, etc.), users are liable to pay tax at 30% under Section 115BBH, plus applicable surcharge and cess, on capital gains (profits) at the time of filing income tax returns. This would be done on a self-assessment basis.

Crypto trade moves to grey market

Several industry insiders pointed out that the trade has moved to the grey market on decentralised exchanges or international exchanges.”The 1% TDS has certainly impacted the trading volume across platforms. But the important question is if users are trading less frequently or if the trading has moved to the Crypto grey market. In India, KYC-compliant exchanges and platforms have established a framework for complying with the TDS as per the government notification. To enhance transparency and aid users’ with their annual returns, CoinSwitch is also providing users with transaction notes with detailed deductions and quarterly Form16A reports. But these compliances may not apply in the grey market where there is no visibility over the real identity of the user or the scale of transactions. The fear is high TDS may disincentivize users from trading within KYC-compliant platforms. The purpose of the TDS is to establish a trail of the transaction. The same can be achieved with a lower TDS rate. This incentivizes users to stay on KYC-compliant platforms and within the regulatory purview. User protection and tax compliance can co-exist,” said Ashish Singhal, Co-founder & CEO, CoinSwitch Amajot Malhotra, Country Head of Bitay believes the Indian government will also lose the possibility of earning huge tax revenue due to a decrease in cryptocurrency transaction volume on platforms.

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