TDS on Crypto and its implications

Well, we had ourselves predicting the stance of the Indian government on Crypto. Turns out they made it pretty clear off late. With a tax of 30% and TDS of 1% on every crypto transaction, the entire country is left wondering about the future of crypto.

So we decided to take the matter into our hands and decode the implications of Tax deducted at source a.k.a TDS on this space. Let’s go!

What is TDS?

TDS is the specific amount of money deducted from payments like salary, rent, commission etc. The person who makes the payment deducts this tax and remits it to the government. And the person who is eligible for payment is liable to pay that tax.

It is done to avoid tax evasion as a part of the tax is paid at the source itself. Hence the name.

In addition to that, the deductee (or receiver of the payment) is eligible for a credit when the TDS certificate issued by the payer is produced. This will make sure that the receiver of the payment does all due tax filing.

Apart from that, it also helps the government track the payment source.

What is TDS on Crypto?

Starting July 2022, the government of India has decided to impose a 1% TDS on all crypto transactions. As per the ruling, it is mandatory for the buyer of the virtual asset to deduct 1% of the amount paid to the seller. This means if you try to sell assets like Bitcoin, Ethereum, and Dogecoin on any exchange, you would receive 1% lesser amount against your purchase.

But How will this Work?

TDS needs to be paid in INR to the government. What happens in the case of crypto to crypto transactions, then? Well, each exchange will have key quote assets/primary assets. Simply put these are the main pairs against which all crypto could be sold. They are usually INR/BTC/USDT/USDC pairs.

In order to reduce slippage, the TDS for such transactions would be deducted from the primary crypto itself.

TDS would be deducted irrespective of your tax slab, however, if you have paid more than the requisite amount or fall in the zero tax bracket, you can file for a claim. The buyer would regardless deduct the TDS and pay it to the government authorities.

Implications of TDS:

Now that you are aware of the nitty gritty of TDS, let us try to understand the kind of impact it has on the cryptoverse. We’ll take a short-term and a long-term view on this.

1. Liquidity Crunch

If you are a hodler (that’s someone who buys and holds crypto for the long term), you are good. The real problem starts if you are a trader. Especially if you are an intraday margin-seeking kind of person.

Why is that? Mainly because for day traders, working capital is a big concern. That’s why they operate on margin (duh!). Now, if each trade takes away 1% from your capital, it can easily pile up to a lot pretty soon. Of course, you can claim it later, but that doesn’t help your case.

Relatable much? What if I told you that there is a platform that gives you a cashback of 1% for each trade so that you don’t feel the pinch? Nope. I am not kidding. Head over to weTrade to find a solution for your sorrows.

2. Volume Impact

As a result, the volumes on exchanges would crumble down. Every exchange out there, be it equity or crypto, does 80% of its volume business with traders. Because these are the folks that are going to use the platform on a daily basis.

I like to call it the mass exodus of July. As soon as the TDS came into effect, trading volumes on all key Indian exchanges fell by ~70%.

The Next Steps?

If you are a regular trader and have been missing the party lately, what should be your next steps? Well, you could of course go off the radar by using foreign exchanges or decentralised counterparts.

But let us make it very clear that Indian tax calculation is based on self-assessment. If you chose not to reveal certain assets or trades and they are found to be taxable later, you are eligible for a penalty, punishment or both.

If you want a legal approach, it is better to side with platforms like weTrade that cover your TDS cost.

Not only weTrade offers you a 1% cashback on crypto transactions, weTrade also enables instant onboarding through cutting-edge KYC technology.