New TDS rules on Cryptocurrency and virtual digital assets starting 1 July 2022

Crypto and digital asset investors have to pay TDS on cryptocurrencies, NFTs, and VDAs. What is the tax rate? How does it work? Know more.

July 1 brings a significant change for crypto investors

New Crypto TDS Rules 2022: Everything you Wanted to Know!

On June 22, 2022, the CBDT (Central Board of Direct Taxes) issued a circular for crypto investors and traders. It notified that they have to pay TDS (Tax Deducted at Source) on the sale and transfer of cryptocurrencies, NFTs, and other VDAs (Virtual Digital Assets). These new TDS rules will come into effect from July 1, 2022. 

How Much TDS will be Deducted on Cryptos and Virtual Assets?

According to the new Section 194S of the Income Tax Act, introduced through the Finance Act 2022, you have to pay 1% TDS on transferring and selling cryptocurrencies, NFTs, and other virtual assets. 

Who will Deduct Crypto TDS?

The CBDT circular says that the crypto exchange deducts the TDS on cryptocurrencies and other virtual digital assets (VDA). This is because the Exchange is making or crediting a payment to the seller. If a broker owns a virtual asset, the Exchange has to deduct 1% tax (as per Income Tax Act’s Section 194S) while making or crediting a payment to the broker. 

Will TDS Certificate be Issued for Cryptocurrencies and VDAs?

Form 16E is a new TDS certificate that has been introduced for crypto TDS purposes. The buyer of crypto or VDA will have to issue this new TDS certificate to the seller. A buyer of the virtual asset has to issue Form 16E within 15 days from challan-cum-statement’s due date of furnishing in Form 26QE. The deducted tax at the time of VDA sale must be deposited within 30-days from month-end in which TDS is deducted. 

Let’s explain it with an example. Suppose a virtual asset is sold through an Exchange on July 20, 2022. The Exchange has to deduct tax while making payment to the seller. This means the tax has to be deposited by the Exchange by August 30, 2022, with the Indian government. Then, by September 14, 2022, the Exchange must issue Form 16E to the seller. 

Will TDS be Levied if Two Virtual Assets are Exchanged or Payment is made in Kind?

A buyer of a virtual asset has to deduct 1% TDS even if the individual buyer makes payment in kind (say, in lieu of a certain kind of service). Moreover, if two persons exchange virtual assets with each other, then both have to deduct TDS. 

Let’s explain these scenarios with the help of an example. Suppose person A exchanges Ethereum (ETH) with person B in Exchange of Bitcoin (BTC). As both persons A and B are exchanging cryptocurrencies with each other, tax has to be deducted by both A and B. Therefore, both have to make their respective tax payments and share their respective payment evidence with the other. 

Can Payment Gateways Deduct Tax at Source on Transfer of Cryptocurrencies?

The payment gateway can’t deduct TDS on crypto transactions under Section 194S of the Income Tax Act. This has been clarified in the Central Board of Direct Taxes circular on June 22, 2022.

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