On June 22, 2022, the Central Board of Direct Taxes issued the much-awaited guidelines on implementation of tax-deducted-at-source (TDS) mechanisms, under Section 194S. These guidelines will be put into effect from July 1, 2022, and concern the transfer of Virtual Digital Assets (VDAs).
So how would this impact VDAs and people dealing in cryptocurrency?
Thanks to these guidelines, crypto exchanges have gained significant clarity on the mechanism to be followed on the deduction of taxes and the filing of TDS returns. They shed light on peer-to-peer transactions and transactions carried out on exchanges (including crypto-crypto transactions) and in computation of thresholds for the applicability of this particular Section.
Let us get into the brass tacks of these specific elements:
In the case of a direct buyer-to-seller transaction, the buyer (i.e; the person paying the consideration) is required to both deduct tax at 1% and pay the tax deducted within 30 days from the end of the month in which the deduction is made (under Section 194S of the Act). The buyer is also required to file TDS returns in Form 26QE.
Transactions carried out through/via exchanges
In the case of a VDA transfer through an exchange, tax will be deducted at 1% (on the selling side) by the exchange on behalf of the buyer. In the circumstance that the VDA is not owned by the exchange – the primary responsibility is of the buyer to deduct TDS. However, the exchange may enter a written agreement with the buyer or his broker regarding all such transactions that the exchange would be deducting and paying the tax on.
Transactions for consideration in kind through an exchange
In the case of crypto-to-crypto transactions (BTC/ETH, for instance) carried out on exchanges, the exchange is required to deduct tax at 1% and report tax on both the purchase and sale of the transaction, based on the detailed mechanisms issued in the guidelines.
Here’s an example: If you exchange USDT for ETH, then 1% of the total value of USDT will be deducted from the sale of USDT. Consecutively, the exchange would also deduct 1% of the total value of ETH from the person selling the ETH on the exchange.
The guidelines also require the exchange to issue a contract note with the details (and the amount in INR) of the tax withheld in kind under Section 194S.
Therefore, in conclusion, here’s a quick summation of Circular 13, 2022 on VDAs:
- TDS deduction would be done by crypto exchanges in most cases (other than peer-to-peer transactions where the buyer is required to deduct the amount of tax).
- Crypto exchanges will deduct tax at 1% from the seller, in the event that the platform or exchange user is buying the cryptocurrency.
- There is no TDS applicable on deposit of fiat currency into the INR wallet of the cryptocurrency exchange.
- Investors and traders can claim credit of TDS deducted by the exchange/buyer when filing annual IT returns.
- TDS will be deducted by the exchange irrespective of a profit/loss position in a particular realized investment.
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