The government had slapped a 1% TDS Deduction rule on crypto transactions, resulting in a steep fall in trading volumes on Indian Exchanges. The 1% TDS or Tax Deduction at source on all crypto transactions, which came into effect on July 1, 2022, has led to a steep fall in crypto trading volume on most Indian crypto exchanges.
The 1% TDS Deduction has affected short-term traders, day traders, and any other investor who wishes to invest in cryptocurrencies for a short period. The legislation seemed ambiguous and made no distinction between short- and long-term investments or the volume. Let us understand the different aspects of this legislation.
Short-term traders, day traders, and anyone looking to invest in cryptocurrencies for a short period have been most affected by the 1% TDS taxation rule.
What is TDS Deduction in General?
In a nutshell, TDS means the sender of any specified payment to the other person will have to deduct tax at the source 1% of the total transaction and deposit it with the central government. The receiver who received the payment and whose income tax has been deducted at source is entitled to get credit for the amount deducted based on Form 26AS or the TDS certificate issued by the deductor.
What is TDS Deduction for Virtual Digital Assets?
The finance minister Nirmala Sitharaman had placed the Finance Bill of 2022, which included a new section under the 194S in the Income-Tax Act, 1961 as TDS, or Tax Deducted at Source for Virtual Digital Assets (VDA).
The law stipulates that 1% TDS will be charged for all transactions of Virtual Digital Assets. It means when any investor sells a crypto asset through a crypto exchange, the exchange will deduct 1% TDS or 1% of the transaction value, which is subsequently paid to the government. The rule is effective on all transactions which are above Rs 10000
To put it another way, when you sell a cryptocurrency, the exchange that facilitates the transaction must deduct and retain 1% of the transaction value as TDS, which is subsequently paid to the government.
This rule applies to transactions worth more than Rs. 10,000. However, these limits apply at the user level across all exchanges they trade.
The buyer or the seller has no role in this process, and you will not be able to take any action on the TDS. The exchange will enforce the deductions per the Central Board of Direct Taxes (CBDT) guidelines under Section 194S. The exchange will send you TDS statements at regular intervals.
The TDS has nothing to do with the profit or loss in the particular transaction. Therefore, if a person is still selling a crypto asset at a loss, the transaction will invite a 1% TDS.