Selling cryptocurrencies bypassing exchange? Here’s how to do 1% TDS deduction

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From July 1, you will have to pay 1 percent TDS (tax deducted at source) on transfer of a virtual digital asset (VDA), as per a new income-tax section, 194S, introduced in the Finance Act, 2022. The TDS is required to be made at the time the buyer makes the payment to the seller. In its previous circular, dated 22 June, the Central Board of Direct Taxes (CBDT) made it clear that onus of withholding TDS will be on the buyer, exchange or broker. Read more about it here.

Now, the CBDT has further clarified how TDS will be deducted in the case of peer-to-peer transactions.

The circular

This circular gives clarity on peer-to-peer transactions that happen outside exchanges where TDS will have to be deducted by the buyer before paying the consideration to the seller. In the case of transacting through exchanges, this onus was on the exchanges. The circular also gives clarity on payment of consideration in kind; the buyer needs to ensure that the TDS has been paid before releasing the consideration in kind or partly in kind or partly in cash.

While the circular will bring clarity, tax experts believe it will also increase the compliance burden for buyers. Amit Maheshwari, tax partner, AKM Global, a tax and consulting firm, said, “The previous circular on VDAs did not deal comprehensively with the withholding obligations in case of peer-to-peer transactions. This circular clarifies the mechanism of deducting tax in such transactions in greater detail and provides more clarity. This shall increase the compliance burden for both buyers and sellers in transactions happening outside exchanges as unlike in the case of an exchange, where the exchange would take care of these compliances, here the buyer will have to do the compliances.”

The increase in compliance means that the buyer and seller will have to calculate and deduct TDS as applicable. Moreover, they will also have to deposit the TDS with the tax department as stipulated. “Though the buyer and seller will not be required to apply for TAN for depositing the TDS under 194S, other implications of Section 206AA for non-furnishing of PAN to each other would still be required to be complied with. Also, once withholding is done under 194S, there is no need for further withholding under any other section,” said Maheshwari.

Where the transfer takes place in kind rather than cash, both buyers and sellers need to pay tax and show the evidence to each other before exchanging the VDAs. Both shall be required to do the requisite filings and compliances as well.

What is a peer-to-peer transaction?

Any transaction that involves only the buyer and the seller and there are no intermediaries or facilitators like an exchange or broker are considered peer-to-peer transactions.

What is an exchange?

As per the income tax department, “exchange” has been defined to mean any person that operates an application or platform for transferring of VDAs, which matches buy and sell trades and executes the same on its application or platform. Most of the exchanges and crypto apps have already informed their clients about the implication of the rule.

In an email, ZebPay, a crypto exchange platform, informed its members, “In compliance with the prescribed tax laws from the effective date, we will be implementing changes to our platform.”

It further explained that ZebPay will deduct this 1 percent TDS at the time of execution of the trade and transfer of the crypto assets from July 1, 2022. The TDS will be then be paid to the Government on behalf of the buyer. You can adjust this against your tax liabilities at the time of filing an income tax return.”

According to ZebPay here is how TDS will impact your transaction.

If you make a sell order for 1 BTC at Rs 20,00,000:

Order value: = Rs 20,00,000
Transaction fees* (0.25% of 20,00,000) = Rs 5,000
TDS applicable (1% of 19,95,000) = Rs 19,950
Final calculation (actual withdrawal amount) = Rs 20,00,000- (5,000+19,950) = 19,75,050
* Transaction fees may vary depending on the tier you belong to