With the growing interest in cryptocurrency trading and investment, understanding the tax implications becomes imperative. This blog sheds light on the concept of Tax Deducted at Source (TDS) related to cryptocurrency, the potential penalties, and the avenues available to minimise or avoid TDS altogether.
As the popularity of cryptocurrencies continues to rise in India, investors are often confronted with the question of how to avoid TDS on their investments. Tax Deducted at Source (TDS) is a tax collected by the Indian government on income earned through various sources, including cryptocurrency investments. In this article, we will discuss how to avoid TDS on cryptocurrency investments in India.
Understanding TDS on Cryptocurrency Investments
The Income Tax Act, 1961, mandates that TDS must be deducted on certain transactions, including cryptocurrency investments. The TDS rate on cryptocurrency investments is 30%, and it applies to the capital gains earned by Indian residents. The TDS is deducted by the cryptocurrency exchange on the transaction value before the investor receives the funds.
How to Avoid TDS on Cryptocurrency Investments?
While TDS cannot be avoided entirely, there are certain ways to minimise it. Here are some ways to avoid TDS on cryptocurrency investments:
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Holding Period
The holding period refers to the duration for which an asset is held. In the case of cryptocurrency investments, the holding period is crucial in determining the tax liability. If an investor holds a cryptocurrency for more than 36 months, it is considered a long-term capital asset, and the gains are taxed at a lower rate of 20%.
If an investor holds a cryptocurrency for less than 36 months, it is considered a short-term capital asset, and the gains are taxed at the individual’s tax slab rate, which can be as high as 30%. Therefore, holding a cryptocurrency for a longer period can help reduce the tax liability.
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Offset Capital Gains
Capital gains earned from cryptocurrency investments can be offset by losses incurred in other investments. For instance, if an investor incurs a loss in stocks or mutual funds, the same can be used to offset the capital gains earned from cryptocurrency investments. This can help reduce the tax liability on cryptocurrency investments.
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Invest in Offshore Exchanges
Investing in offshore cryptocurrency exchanges can help avoid TDS on cryptocurrency investments. However, it is essential to note that investing in offshore exchanges is not legal in India, and it comes with considerable risk. Investing in offshore exchanges can lead to legal consequences and attract penalties from the Indian government.
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File Advance Tax
Advance tax is a tax paid in advance on the estimated income of an individual. If an individual’s tax liability exceeds ₹ 10,000, they are required to pay advance tax. Advance tax can help avoid TDS as it ensures that the tax liability is paid in advance, and there is no need for TDS on cryptocurrency investments.
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Invest in Sovereign Gold Bonds
Sovereign Gold Bonds are a popular investment option in India as they offer returns similar to physical gold without the hassle of storing it. The gains earned from sovereign gold bonds are tax-free, making it an attractive investment option.
Investing in sovereign gold bonds can help avoid TDS on cryptocurrency investments. Our team of experts can provide guidance on the legal requirements and tax implications related to investing in sovereign gold bonds. Get in touch with our lawyers for more information.
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Opt for P2P Trading
Peer-to-peer (P2P) trading is a popular alternative to traditional cryptocurrency exchanges in India. In P2P trading, investors can directly buy and sell cryptocurrencies with other individuals without the involvement of a centralised exchange.
Since P2P trading does not involve an exchange, there is no TDS deduction. This is an excellent option for investors who wish to avoid TDS on their cryptocurrency investments.
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Utilise the 80C Deduction
Section 80C of the Income Tax Act offers a tax deduction of up to ₹1.5 lakhs on certain investments. This section covers various investment instruments, including Public Provident Fund (PPF), National Savings Certificate (NSC), and Equity-Linked Savings Scheme (ELSS).
Investors can utilise the 80C deduction to offset their tax liability on cryptocurrency investments. This is an excellent option for investors who want to invest in cryptocurrencies without the added burden of TDS.
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Invest in Tax-Free Bonds
Investing in tax-free bonds is another alternative to avoid TDS on cryptocurrency investments. Tax-free bonds are issued by government agencies and do not attract TDS deductions. The interest earned on these bonds is also tax-free.
Investors can use tax-free bonds to offset their tax liability on cryptocurrency investments. We can help investors in India comply with the tax laws related to their cryptocurrency investments.
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Use a Trading Bot
A trading bot is an automated tool that can buy and sell cryptocurrencies on behalf of the investor. Trading bots are programmed to follow pre-determined rules and can execute trades based on market conditions.
Since trading bots do not involve the manual intervention of an investor, there is no TDS deduction. This is an excellent option for investors who want to trade cryptocurrencies frequently and avoid TDS on their investments.
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Invest in Cryptocurrency Mutual Funds
Investing in cryptocurrency mutual funds is another alternative to avoid TDS on cryptocurrency investments. Mutual funds pool investors’ money and invest in a diversified portfolio of cryptocurrencies.
Since the mutual fund is registered with the Securities and Exchange Board of India (SEBI), there is no TDS deduction. Investors can use mutual funds to offset their tax liability on cryptocurrency investments.
Conclusion
TDS on cryptocurrency investments is an unavoidable tax, and investors must pay it when they earn capital gains from their investments. However, there are certain ways to minimise the tax liability, such as holding the investment for a more extended period, offsetting capital gains with losses, investing in offshore exchanges (which is not legal), filing advance tax, or investing in sovereign gold bonds.
Investors must understand the tax implications of their cryptocurrency investments and comply with the rules and regulations laid out by the Indian government. Failing to comply with the tax rules can lead to legal consequences and attract penalties from the government. Therefore, it is essential to be aware of the tax laws and comply with them.
Vakilsearch is a legal services provider that can help individuals and businesses navigate the complex tax laws and regulations related to cryptocurrency. We can help you with tax planning and compliance, including record-keeping and reporting requirements. We can also assist with filing tax returns and responding to tax-related inquiries from regulatory authorities.
FAQs on TDS on Crypto
Can you claim 1% TDS on crypto?
Depending on jurisdiction and specific tax laws, certain deductions might apply to cryptocurrency. Always consult your local tax authority or a tax professional for accurate guidance.
Is it possible to avoid TDS on cryptocurrency?
The possibility of avoiding TDS depends on the local tax laws and regulations. Legitimate means like availing tax exemptions or leveraging specific deductions can be explored, but it's vital to ensure compliance with local laws.
How do I avoid the 30% tax on cryptocurrency?
The tax rate and methods to reduce it can vary by country. Some methods include holding the crypto for a longer period if long-term capital gains are taxed at a lower rate, or offsetting gains with losses. Always consult a tax professional for advice tailored to your situation.
What is the TDS penalty for cryptocurrency?
Penalties for not deducting or paying TDS on time can be severe and vary based on local regulations. It's essential to understand the potential penalties in your jurisdiction and stay compliant.
How can I skip TDS deduction on crypto transactions?
To avoid TDS deduction, one may have to prove that the transaction doesn't fall under a taxable event, or they may have to furnish specific declarations or forms. Always ensure you're acting within the bounds of the law.
Can I get a TDS refund for cryptocurrency?
If excess TDS has been deducted from what is due, individuals may be eligible for a refund. This would typically require filing a tax return and showing the over-deduction.
Which form should I use to avoid TDS on cryptocurrency?
The specific form would depend on local tax regulations. In many jurisdictions, there are forms to declare that no TDS should be deducted, but their applicability to crypto transactions must be verified.
How do I report cryptocurrency income in my Income Tax Return (ITR)?
In most countries, cryptocurrency earnings (be it from trading, staking, or mining) should be reported in the annual income tax return. The specific manner and form can vary, so it's advisable to consult local tax guidelines or a tax professional.
What is the tax rate for cryptocurrency income on platforms like WazirX and CoinDCX?
The tax rate isn't determined by the platform but by the local tax authority. Both WazirX and CoinDCX are platforms based in India; hence, Indian tax rates would apply for residents. However, always verify the current tax rate with a local authority or professional. Profits earned from trading cryptocurrency are subject to a 30% tax rate along with an additional 4% cess, as stipulated by Section 115BBH.
How do you beat cryptocurrency tax?
It's essential to act ethically and within the law. While there are legal strategies to minimize tax liability, such as tax-loss harvesting or leveraging tax exemptions, evading taxes can lead to severe penalties. Always prioritize compliance and seek professional guidance.
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