TDS on Crypto Kicks In: Check out this FAQ answered by a tax expert

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The new rules around the tax deducted at source (TDS) on virtual digital assets (VDAs) will come into effect from today. Under the new rules, the seller will get 1% TDS from the buyer when transferring the VDAs. This will be applicable if the amount paid exceeds a certain limit.

In order to bring more clarity on new rules around the VDAs, Moneycontrol posed six FAQs to Lakshmi Rao, CA and co-founder of Catax.

Here are the excerpts from the conversation:

Q: If we have paid TDS while buying VDA, do we have to pay TDS while selling it too?

In case of transactions made through exchange

Under Section 194S, filing TDS is the responsibility of the buyer, and when you are trading on exchanges, TDS calculation and filing is taken care of by exchanges on customers' behalf.

In case transaction isn't done via exchange

In this case, the onus of filing TDS falls upon the buyer.

In case of P2P (peer-to-peer) crypto-to-crypto transaction

It is unclear which party will be responsible for paying the TDS.

Q: Are there any surcharges in addition to the 30% tax?

Gains on crypto assets are taxed at a rate of 30% plus surcharge and cess.

Depending on the taxable income, the surcharge is 10 per cent, 15 per cent, 25 per cent, or 37 per cent of the tax amount.

In addition to that, cess is 4 per cent of the combined tax and surcharge amount.

• If there is no surcharge, the effective tax rate will be 31.2 per cent, including cess only.
• If the surcharge is 10 per cent, the effective tax rate is 34.32 per cent.
• If the surcharge is 15 per cent, the effective tax rate is 35.88 per cent.
• In the case of a 25 per cent surcharge, 39 per cent is the effective tax.
• At a 37 per cent surcharge, the effective tax rate will be 42.744 per cent.

Q: For crypto investors filing income tax, do they need to file two different returns – one for regular income and the other for crypto investment?

Income made from crypto investment should be disclosed in the section "Income from Other Sources" during ITR filing. From next year, crypto income will have a separate column and filing standards to make filing and auditing seamless.

Q: Will TDS be deducted irrespective of profit/loss?

A:  Irrespective of profit or loss, TDS is to be deducted on all trades, which includes crypto to rupee, rupee to crypto, and even crypto to crypto. Any withdrawal/transfer in crypto from exchanges is deemed a sales event, and TDS shall be deducted.

Q: Is there any exemption from TDS?

A: Individuals, companies, firms or HUF trading under a threshold of Rs 10,000 are exempt from TDS liability and, based on turnover or gross receipt and status of audit threshold, is raised to Rs 50,000.

Q: Do you get a refund on crypto TDS deduction if you incurred an overall loss on cryptocurrency?

A: Yes. TDS deposited by exchanges can be claimed for a refund if a loss is incurred on the crypto transaction. It should be noted that no set-off of losses is allowed for various cryptocurrencies. By that, we mean that if you have made a loss in trading Dogecoin, you won't be able to adjust it from the profits of, say, Bitcoin.

The cryptocurrency market in India grew from 6 million users in March 2020 to 17 million users in March 2021 and a staggering figure of almost 90 million users as of March 2022. That's a year on year growth of 421% from 2021 to 2022. This means that there were almost 90 million users who used a cryptocurrency exchange or trading platform in the month of March 2022 alone.