What the 1% TDS on cryptocurrencies means
The Finance Act 2022 introduced a 1% tax deduction at source (TDS) on transfers of Virtual Digital Assets (VDAs), a category that includes cryptocurrencies and certain digital tokens. In plain terms, when a crypto asset is transferred, the payer (or transferee) must deduct 1% of the payment as TDS and remit it to the tax authorities.
Who is responsible and when it applies
- Responsibility: The person making the payment for the transfer is generally required to deduct the 1% TDS.
- Scope: The rule covers transfers of VDAs regardless of where the parties are located, and applies to exchanges, brokers and peer-to-peer transfers where a payable consideration is involved.
- Timing: TDS is to be deducted at the time of payment or at the time of credit of consideration to the transferor, whichever is earlier.
Why the government introduced this
The 1% TDS serves several government objectives: it creates a paper trail for crypto transactions, helps with tax compliance by tracking gains and losses, and functions as an advance tax collection mechanism. For regulators, this step signals a move to bring more transparency into an otherwise opaque market.
Impact on traders, exchanges and liquidity
- Traders: Regular traders may feel an immediate cash-flow impact because a portion of receipts will be withheld at source. This can be particularly relevant for high-frequency traders and small investors.
- Exchanges and service providers: Crypto exchanges will likely automate TDS deductions and reporting, increasing their compliance burden but making it easier for users to claim credits later.
- Market liquidity: Withholding a slice of transactions could affect short-term liquidity and trading behaviour, although the long-term effects will depend on how exchanges and investors adapt.
Practical steps for investors and businesses
- Keep clear records of all VDA transactions — dates, amounts, counterparties and transaction IDs.
- Check whether the platform you use is deducting TDS automatically and obtain TDS certificates if available.
- Track TDS credits when filing tax returns; excess TDS can generally be claimed back as a refund or set off against tax liability.
- Consult a tax advisor for complex situations like cross-border transfers, staking rewards or non-custodial trades.
Bottom line
The 1% TDS introduced by the Finance Act 2022 marks a significant step toward formalising the crypto ecosystem. It doesn’t itself determine the final tax on gains, but it creates a compliance framework that investors and service providers will need to factor into trading strategies, cash management and tax planning.