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Over the past five years, cryptos have dominated discussions, attracting individuals of various ages and professions due to their remarkable return on investment. Many people achieved astonishing profits, and stories of individuals suddenly attaining wealth are notable.
However, this dream took a hit when the government implemented a 1% Tax Deducted at Source (TDS) on crypto asset sales.
On June 22, 2022, the Central Board of Direct Taxes (CBDT) released a circular detailing the deduction of taxes from Virtual Digital Assets (VDA) and cryptos. The circular also specified that the most recent TDS ruling on VDAs would come into effect on July 1, 2022.
In this article, let’s have an understanding of the implications of the 1% TDS on crypto for investors.
Before we have an overview of 1% TDS on crypto, let’s have a quick look at TDS.
What is TDS?
Tax Deducted at Source (TDS) serves as a tax collection mechanism within India, operating under the regulatory framework of the Income Tax Act of 1961. Its oversight and administration fall under the purview of the Central Board of Direct Taxes (CBDT), a component of the Indian Revenue Service (IRS). TDS applies to various transactions involving payments made by individuals, corporations, and other entities.
The fundamental purpose of TDS is to guarantee the deduction of income tax right at the source, thereby averting a scenario where taxpayers must settle their entire tax obligations in a lump sum at the close of the fiscal year.
What is Crypto TDS?
Tax Deducted at Source (TDS) is a system where taxes are deducted at the source of income, acting as an advance tax payment. In this context, crypto TDS is applicable when specific transactions meet criteria defined by tax authorities. The Income-Tax Act of 1961 introduced a new section, 194S, via the Finance Bill of 2022, levying a 1% TDS on the consideration paid for the transfer of Virtual Digital Assets (VDA). As cryptos fall under the definition of VDA, TDS is applicable to certain crypto transactions.
Crucial Points About 1% TDS on Crypto
- Starting from July 1, 2022, crypto transactions will be subjected to a 1% TDS.
- The TDS on crypto assets is deducted and remitted to the Central Government.
- In transactions conducted via Peer-to-Peer (P2P) platforms or foreign exchanges, it is the responsibility of the buyer to withhold the TDS.
- When individuals engage in crypto-to-crypto trades, the buyer and the seller will incur a 1% TDS charge.
Nevertheless, if the cumulative value of crypto transactions in a financial year does not reach Rs 50,000, individuals will not be obligated to make any TDS payments.
For better clarity, you can check the following table.
The following rates are applicable for TDS on various crypto transactions:
It’s important to note that if a user hasn’t filed their Income Tax Return in the last two years, and the total TDS amount for each year is ₹50,000 or more, the TDS rate for crypto-related transactions will be increased to 5%.
How Can You Check TDS on WazirX?
On WazirX, users can check the deducted TDS on crypto for a specific trade by visiting their completed order history and selecting the trade. The deducted TDS amount will be displayed. For a comprehensive history of TDS deductions, users can download their trading report by going to Account Settings > Download Reports > Trading Report > Enter the timeline > Request Trading Report.
In the above example, TDS is deducted in USDT. Later on, WazirX converts this USDT into INR and transfers it to the Income Tax Department.
As crypto gains mainstream acceptance in India, the government is taking steps to ensure proper taxation and compliance. Implementing TDS on crypto transactions is one such measure. As a responsible citizen, every taxpayer involved in crypto transactions must know these regulations and fulfill their tax obligations transparently.
TDS deduction is essential to crypto trading, ensuring compliance with tax regulations and contributing to the country’s revenue. WazirX takes care of TDS deductions on behalf of its users, making the process smooth and hassle-free. By understanding the rates, provisions, and tracking methods, crypto traders can stay informed about their Crypto tax liabilities and efficiently manage their crypto investments.
How Will 1% TDS on Crypto Impact Investors?
The introduction of a 1% Tax Deducted at Source (TDS) on crypto transactions has left many investors wondering about its impact on their holdings and trading strategies. This move implies that investors would incur a 1% deduction from their capital with every crypto trade. While any excess TDS above the actual tax liability would eventually be refunded, it poses a significant challenge for day traders and short-term investors.
For day traders who engage in frequent trades, this 1% deduction can quickly add up, eroding their capital base and reducing overall profitability. It could also deter active day trading, potentially leading to a decline in trading volumes across crypto exchanges.
In response to this development, the crypto industry has urged authorities to reconsider this 1% TDS rate or, ideally, lower it to a more manageable 0.01%. This proposed reduction would strike a balance between the government’s objective of tracking crypto transactions and the crypto market’s need for liquidity and fair market prices.
Lowering the TDS rate to 0.01% could be a win-win situation for all stakeholders. It would allow traders to maintain their capital more effectively, ensuring minimal disruption to trading volumes while still enabling tax authorities to monitor crypto transactions effectively.
In conclusion, the 1% TDS on crypto transactions has raised concerns among investors and industry players. Finding the right balance in TDS rates is crucial to maintaining a thriving crypto market, protecting investors’ capital, and meeting the tax authorities’ monitoring objectives.Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.