tds: What is 1% TDS on crypto trade and how will it impact you?

Synopsis

While the industry players see this move as one of the most controversial provisions over the crypto taxations, the government believes that the new TDS mechanism is used to trace transactions and prevent tax evasion.

New Delhi: After the 30 per cent taxation on the gains arising from the crypto assets, the government will implement the 1 per cent tax deducted at source (TDS) on the transfer or consideration of every trade from July 1, 2022.

However, the market players are awaiting the ‘clarities’ over the new taxation norm and the Government of India has about two months to provide the required ‘specifications’ seeked by the players.

While the industry players see this move as one of the most controversial provisions over the crypto taxations, the government believes that the new TDS mechanism is used to trace transactions and prevent tax evasion.
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Crypto businesses, particularly the exchanges, have repeatedly demanded to remove or lower the TDS, which for them is the biggest pain point in the new crypto tax legislation.

Avinash Shekhar, CEO, ZebPay said that in the case of a crypto-fiat transaction, the buyer would need to deduct this amount and deposit it on behalf of the seller, allowing the tax authorities to effectively monitor all crypto specific transactions entered into by Indian residents.

“In the case of crypto-crypto swaps, the 1 per cent TDS will be applicable to both parties based on the fair market value (FMV) of the crypto on the date of the transaction,” he added.

TDS is a liability enforced against the exchanges that deposit tax on behalf of sellers on the platform. It will be calculated at 1 per cent of the transaction value.

Until now, it is quite unclear how TDS will be calculated and how exchanges will share data with the government. The industry is seeking clarity on two major points – trading and swaps of virtual digital assets (VDA).

Sathvik Vishwanath, Co-founder and CEO, Unocoin said that the 1 per cent TDS on every sale of crypto asset is not a separate tax but it will become part of the income tax filing.

“The traders and market makers are afraid that this will eventually lock up the bulk of the corpus over a period of time and they need to wait till filing the returns next year to get the refunds,” he added.

How will it impact you?
This would mean that investors would lose 1 per cent of their capital 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.

“The amount of capital invested in crypto would constantly reduce with each trade, in effect, reducing overall profits of the category,” said Shekhar from Zebpay. “From an exchange point of view, the 1 per cent TDS would discourage active day trading, leading to an overall reduction in trade volumes.”

Industry demands
The crypto players have been demanded to walk away with the 1 per cent TDS rule, or atleast lower it to 0.01 per cent.

“The government wants to track the trade through this TDS, which can be done by putting this rate as low as 0.01 per cent,” said Vishwanath from Unocoin. “At 1 per cent TDS, the crypto market will be illiquid.”

The industry advocates a reduced TDS of 0.01 per cent as this would be win-win for all stakeholders. Higher TDS may skey the fair market price, the market players fear.

“The tax authorities would still be able to meet their goal of monitoring crypto transactions while greatly reducing the negative impact on the capital of day and short-term traders,” Shekhar from Zebpay said.

Lower TDS rates would ensure that overall trading volumes are negligibly impacted allowing for increased profitability for traders and as a result higher taxation volumes for the nation, he argued.

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Updated: 04/29/2022 — 14:00