Unwinding the 1% Crypto TDS
Simplifying how the 1% TDS will be levied while filing taxes
Cryptocurrencies have been recognized as taxable assets after months of anticipation. This was accompanied by a hefty 30% tax on investment gains, thereby putting an end to any doubts about its legality. Investors and market players will face enormous costs; this is not the correct move, but it is a step in the right direction. One thing is certain: February 1, 2022, will go down in Indian crypto history as a watershed moment.
Indian Finance minister Shri Nirmala Sitharaman has suggested a plethora of modifications to the 1961 Income Tax Act to execute these objectives. Among these include the addition of various sections and clauses such as Section 115BBH, 194S, and Clause 47A.
In order to trace all such transactions, our finance minister also proposed a 1% tax deduction at source (TDS) on payments made in conjunction with the acquisition of virtual assets.
Breaking it down
Given the size and frequency of cryptocurrency transactions, the government has recommended the following tax structure for the industry:
- Profits from cryptocurrencies, including NFT sales and mining incentives, are subject to a 30% tax.
This 30% tax on profits takes into account the 1% TDS deposited by the facilitator/exchange/person responsible for paying the consideration on every crypto transaction, which is calculated starting July 1, 2022.
- Cryptocurrency Gifts are subject to a 30% tax.
The catch is that gifts from relatives aren’t taxed, but gifts from friends are.
What is TDS?
TDS (Tax Deducted at Source) is a specified amount that is deducted when a certain payment is received, such as a salary, compensation, rent, interest, professional fees, and so on. The person making the payment deducts tax at the source, whilst the person receiving the payment/income is required to pay tax. It reduces tax fraud because the tax is collected at the moment of payment.
Do I need to pay TDS for any amount traded?
If the transaction/payment is done by an individual or a Hindu Undivided Family (HUF) with a turnover of less than INR 1 crore for businesses and less than INR 50 lakh for professionals. The threshold limit is INR 50,000. Below which the Individual will be exempt from TDS.
The TDS threshold is 10,000 if the trade is carried out by parties other than those listed above.
It is critical to mention that this threshold will apply to trades executed from April 22 through March 23 of the fiscal year.
Which trades will be eligible for 1% TDS?
The 1% TDS will be applicable on the following trades:
- Spot market sell (INR and Non — INR pairs)
- Example: BTC/INR, ETH/INR
- Spot market buy (Non-INR pairs/ Crypto to Crypto Pairs)
- Example: BTC/USDT, BTC/USDC
How is the TDS calculated for Spot Market trades? Explained with an Example
To better understand the concept of TDS and how the overall crypto taxation structure would work, here’s a simple explanation. Consider the following scenario:
- Assume that on July 1, 2022, you get Rs 1 lakh, and you decide to invest in bitcoin.
- On August 1, your portfolio value drops to Rs 50,000.
- You consider cashing out with a loss of Rs 50,000 to avoid further losses.
- After a 1% tax is deducted at the source, you get Rs 49,500 instead of Rs 50,000.
(1% of INR 50,000 = INR 500.)
(50,000–500 = 49,500)
Keep in mind that cryptocurrency exchanges have additional fees, so there will be additional expenses
- Now, you decide to put Rs 49,500 into Ethereum on August 1.
- On March 1, 2023, the price of Ethereum rises to Rs 80,000. You sell again and get Rs 79,200 after TDS.
- You don’t buy any more cryptocurrency on March 1.
Now that Financial Year 2023 has begun, here’s what you did with your crypto investments:
- You lost Rs 50,000 on Bitcoin and have to pay TDS of Rs 500.
- You made Rs 30,500 from Ethereum and paid Rs 305 in TDS.
- Your total tax liability at the end of the financial year will be 30% of Rs 30,500 which equates to Rs 9150.
- You paid Rs 1,305 in TDS altogether for the financial year.
- The remainder would be paid at the time of filing taxes.
Can we offset losses on one Crypto with profit from another?
According to the ministry of finance, the planned taxation laws for virtual digital assets would not allow individuals to offset losses on one asset against profits on another.
Simply said, if you bought and sold two cryptocurrencies, say, Bitcoin and Ethereum, and lost Rs 10,000 on Bitcoin but made a profit of Rs 10,000 on Ethereum, your taxable income will still be considered Rs 10,000.
Will TDS be calculated based on the Net amount or the Gross amount of the trade?
TDS will be charged based on the ‘net’ consideration payable after deducting GST/exchange fees.
5% TDS for those who fail to file Income Tax
According to Section 206AB of the Income-Tax Act of 1961, if a user has not filed their Income Tax Return in the prior two years and the amount of TDS is 50,000 or more in each of the past two years, the TDS to be deducted would be 5%.
Will a 30% Crypto Tax be added on top of TDS?
According to the government, the 30% tax will be levied on the overall profit listed while filing tax returns. The TDS, however, will be applied to every cryptocurrency trade type that was mentioned above.
About Coinsbit India
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Disclaimer: Crypto assets are volatile, and investments in them are risky. We advise you to do thorough research before investing.