Home / Markets / Cryptocurrency /  After 30% tax rate, cryptocurrency assets to bear 1% TDS. How taxes impact crypto gains

After 30% tax rate, cryptocurrency assets to bear 1% TDS. How taxes impact crypto gains

After the 30% tax rate, now cryptocurrency investors will also face a 1% tax deducted at source (TDS) on their assets. (REUTERS)Premium
After the 30% tax rate, now cryptocurrency investors will also face a 1% tax deducted at source (TDS) on their assets. (REUTERS)

  • On June 22, CBDT clarified saying that 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% of such sum as income tax thereon.

The much-needed clarification on taxation on cryptocurrency assets in India has been provided. After the 30% tax rate, now cryptocurrency investors will also face a 1% tax deducted at source (TDS) on their assets. However, experts believe that cryptocurrency assets should be treated fairly like other asset classes for overall industry growth. In long term, crypto investors may struggle in hedging liquidity in this market.

On June 22, the Central Board of Direct Taxes (CBDT) clarified saying that 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% of such sum as income tax thereon.

It also said 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.

However, the deduction is not required in case of the consideration payable by a specified person and the value does not exceed 50,000 during a financial year.

On the other hand, the TDS exemption is up to 10,000 in a fiscal year applicable to any person other than a 'specified person'.

According to the CBDT, the specified persons are - 1) an individual or Hindu Undivided Family (HUF) who does not have any other income under “profit and gains of business or profession"; and 2) an individual or HUF having income under "profits and gains of business or profession" whose gains from business carried on by him does not exceed 1 crore or in case of profession exercised by him does not exceed 50 lakh.

Under section 194S of the Act, the CBDT has issued guidelines, for the removal of difficulties, with the approval of the Central Government. The 1% TDS will come into effect from July 1, 2022. 

TDS on crypto assets explained:

In a blog dated June 24, CoinSwitch gives an example for a better understanding of TDS on crypto assets. For example - Imagine you need to sell 10 tokens (Name the entity as A). The selling price of each token currently stands at 20 (Entity B). Commission and service charge at CoinSwitch, including discount, exchange fee, and GST (Entity D), let's say is Re 1.

As per CoinSwitch, in the example, total token sale value = A x B: 10 x 20 = 200 (Entity C). Meanwhile, the net sale would be = C – D = 200 – 1 = 199. Then, TDS will play the role on the token sale sum (i.e. 1% of 199, or 1.99) (Entity E). That said, the final sum would reflect in your CoinSwitch account = C – D – E = 200-1-1.99 = 197.01.

CoinSwitch explained that TDS will still 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.

TDS is applicable on 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, CoinSwitch added in its blog.

How Taxes Impact Crypto Gains?

Sidharth Sogani, chief of crypto market research firm Crebaco Global expects 1% TDS to impact the crypto market in the long run. According to the expert, most liquidity providers in the crypto market have already backed out because of India’s crypto policy, coupled with market prices right now.

Thereby, now investors who held onto their crypto assets for the past few months due to volatile markets as they didn't want to book losses - will face the brunt of 1% TDS ahead.

As per Sogani, when prices come back up and investors want to sell - there will be no liquidity for them to do so. The TDS may not impact in short term within the first 15 days from July 1, however, the issues will become apparent after, say 45 days.

Poorvi Sachar Head - of Operations, Tezos India said, "Taxing crypto is absolutely detrimental to the future of this nascent and evolving technology as it would be demotivating and may result in slowing down the adoption rate."

According to the Tezos India expert, currently, there is no offsetting for gains and losses and it becomes worse if there’s a net loss after offsetting and a tax of 30% is imposed on top of it.

"Crypto-assets should be treated fairly like other asset classes for overall industry growth in the long run," Sachar added.

For instance, any profits or gains arising from the sale of capital assets including equity shares, mutual funds, bonds, and other commodities are subject to short-term and long-term capital gains taxation.

Capital assets that are held for more than 36 months are called short-term capital assets. In some cases, assets like equity or preference shares in a listed company, other listed securities, UTI units, equity-oriented funds units, or zero-coupon bonds - held not more than 12 months are also classified as short-term assets. In the case of unlisted shares and immovable property, these assets held not more than 24 months are also said to be short-term.

Meanwhile, capital assets held for more than 26 months or 24 months, or 12 months in the above-mentioned cases - are called long-term capital assets.

Under short-term capital gains tax, if Securities Transaction Tax (STT) is not applicable - then the short-term capital gains become other income tax return items and the taxpayer is taxed according to the income tax slab rates. However, if STT is applicable than the short-term capital gains tax is 15%

In regards to long-term capital gains tax, a 10% tax rate is levied on the sale of equity shares/units of equity-oriented funds on amounts above 1 lakh. The tax rate is 20% on assets except for equity shares/equity-oriented funds.

Currently, there are no TDS applicable to domestic investors on their capital gains. However, NRIs are subject to 30% TDS on short-term capital gains and 20% in the long term. Form 15G /15H wherever applicable is available and needed to be submitted to the IT department to avoid TDS.

From the above, it can be said that cryptocurrency gains or losses still have higher tax rates compared to the short term and long term capital gains taxation. Also, TDS is limited to NRIs in capital assets unlike the 1% on crypto assets available for residents. 

 

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