TDS on cryptos and virtual digital assets from 01 July – what should you know

Cryptocurrencies have taken the world by storm. It is the new age investment option that has attracted not only the younger generation but also the older one. The popularity of cryptos has seen tremendous increase which most experts believed would attract government attention to the same and bring it under the ambit of taxation. And sure enough, the government introduced taxation on cryptocurrencies in the budget of 2022. 

The taxation on cryptocurrencies as per the budget of 2022 and related aspects are mentioned hereunder. 

What are cryptocurrencies and how are they taxed?

Before we go any further, let us first understand the meaning of cryptocurrencies. Cryptocurrencies are a form of digital or virtual asset in which investors can invest through a digital platform. Cryptocurrency can be stored in a digital wallet and can be accessed by investors through a private key. They are available in the form of a unique code that cannot be copied. The ownership of the code is stored on an independent blockchain that cannot be altered thereby making it safe for investors. 

Cryptocurrency has been included under the purview of taxation owing to its growing popularity and reach. However, the currency is still not legalized in the country. The budget of 2022 has cleared the ambiguity relating to the treatment of the cryptocurrency and Virtual Digital Assets (VDAs) and mentioned that gains from these assets will be treated in line with the lottery winnings.

Therefore, gains from cryptocurrency will be taxed at a flat rate of 30% without the benefit of indexation or deduction of any expenses except the cost of acquisition. Also, the losses from cryptocurrencies cannot be carried forward for set-off against gains in future years.

What is Section 194S of Income Tax Act?

In relation to the amendment in the taxation of cryptocurrencies, the government has also introduced the levy of TDS on cryptocurrency transactions. This move was adopted to keep a tab on the ever-increasing volume of transactions in VDAs and secure all the details of the same. Therefore, a new section 194S was introduced in the budget of 2022 in the Income Tax Act, 1961. 

This provision will be applicable to all transactions from 1st July 2022. As per these provisions of this section, TDS at the rate of 1% will be deducted from the sale consideration of any VDAs. It is to be noted that deduction of TDS is applicable only if the cumulative value of the transactions exceeds Rs. 10,000 in any financial year. 

However, the provisions of section 194S will not apply in cases where the amount paid by ‘specified persons’ does not exceed Rs. 50,000 in any financial year. For the purpose of this section, ‘specified person’ is defined as

1. A person of or HUF (Hindu Undivided Family) having any income other than under the head ‘Profits and gains from business or profession’
2. A person or HUF having income under the head ‘Profits and gains from business or profession’ but the business turnover is not more than Rs 1,00,00,000 or gains from professions are not more than Rs. 50,00,000 in the financial year preceding the year in which VDAs are sold or transferred.

Who is responsible to deduct TDS under section 194S?

Section 194S further mentions specific situations regarding the onus of deduction of the TDS. the details of the same are mentioned below.

1. When the VDAs are transferred through crypto exchanges

When the VDAs or cryptos are transferred through the crypto exchange, the onus of deducting the TDS is on the exchange that is crediting the payment to the seller. In case when the transaction is done through a broker, the onus of deduction of TDS is on the exchange and the broker unless there is a written agreement between the exchange and the broker that the TDS will be deducted by the broker. 

2. When VDAs are transferred through cash

When there is no exchange or broker involved in the same of VDAs, the responsibility of deducting the TDS is on the buyer while making the payment to the seller of VDAs.

3. When the transfer is done in kind

When the transfer of VDAs is done in kind (for example, in exchange for another VDA), both the parties are buyers and sellers. Each party will have to show proof of tax paid for the assets involved. If the transaction is done in kind through an exchange, it will be practically difficult to comply with the TDS provision. The government in such cases has provided a defined mechanism to ensure compliance. 

4. When VDA is owned by the exchange

In case when the VDA is owned by the exchange, the onus of deducting the TDS is on such exchange. The exchanges will have to enter into a contract with the customers or their brokers and deduct the TDS and maintain a complete trail of transactions as well as disclose them in their tax returns.  

Conclusion

Taxation on cryptocurrencies was long overdue and was expected by the investor class in the latest budget. The move by the government has removed any ambiguity relating to the taxation of the cryptocurrency and VDAs and will streamline the transactions in the digital currency. TDS on cryptocurrency will help in getting better transparency and security of digital currencies.

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