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Budget 2024: Why Crypto Investors F&O Are Happy – No STT, No TDS, No 30% Tax
Budget 2024 increased the Securities Transaction Tax (STT) on all futures and options (F&O) contracts traded on recognized exchanges. However, this does not apply to cryptocurrency F&O transactions. Additionally, some cryptocurrency exchanges have taken the position that no tax deducted at source (TDS) is required to be levied on cryptocurrency F&O transactions. Investors may find cryptocurrency F&O transactions attractive as they may not be subject to the 30% flat tax on cryptocurrency gains. TDS in some exchanges, and there is not either STT.While the Budget 2024 “Although Budget 2024 introduced changes to STT rates for F&O transactions in securities, these changes do not apply to crypto transactions as crypto transactions are classified as commodities. Therefore, the rules for F&O crypto transactions regarding TDS and Section 115BBH tax rate “The taxes remain the same and no additional tax is charged on these transactions,” says CA Abhishek Soni, co-founder, Tax2Win.
When to deduct TDS from crypto and VDA transactions
As per section 194S, 1% TDS is deducted on all VDA transactions from 1st July 2022.
“A new section 194S has been introduced in relation to TDS on payment on transfer of VDAs through the Finance Act, 2022. Under this provision, any person making payments (in excess of the prescribed threshold) to any resident for transfer of VDAs will be liable to withholding tax at the rate of 1% of the value of VDAs,” says Deepa Sheth, Partner, Corporate Tax, Tax & Regulatory Services, BDO India.
However, there is an ambiguity in the interpretation of the law on TDS deduction on crypto F&O transactions. According to Nithin Kamanth’s social media post on July 10, 2024, “On one hand, SEBI is working to restrict F&O, but on the other hand, this crypto F&O ad is on the front page (of a newspaper). By the way, all these platforms have taken the stand that the 1% TDS rule does not apply to crypto F&O. For regular crypto transactions, 1% of the transaction is deducted as TDS. Something @nsitharaman and @FinMinIndia should check.”
“Crypto FNO is not allowed in India and if crypto FNO takes place on any platform, trading platform, which is not based in India, is totally illegal as per the RBI and will require criminal prosecution sooner or later,” says chartered accountant Manoj Dembla who has over 30 years of experience in finance, accounting, taxation and insolvency.
What is the possible reason why TDS is not deducted from F&O crypto transactions?
“Derivatives (i.e. futures and options) are financial instruments without intrinsic value and therefore derive their value from the performance of other financial assets such as indices, interest rates, stocks, cryptocurrencies, etc. Crypto derivatives do not fall within the scope of Virtual digital assets (VDAs) as it is not accompanied by a promise or representation of intrinsic value, or functions as a store of value or unit of account and settlement is made by means other than actual delivery. As such, the provisions of section 115BBH as well as 194S may not apply. However, it is pertinent to note that this view is not supported by any clarification from the Income Tax Department and is based on the interpretation of the bare provisions as mentioned above,” states CA (Dr.) Suresh Surana.
Sheth explains how a crypto F&O trade works and why some platforms do not take a TDS position. “TDS is applicable to the transfer of VDA. However, in the case of F&O, the trader is speculating on the price movements of an underlying VDA without actually owning it and hence some platforms have taken the view that crypto F&O trades, perpetual contract trades or otherwise, are not subject to TDS,” she says.
According to CA Amit Kumar Baid, Head of Tax at BTG Advaya, “The Indian tax landscape for crypto futures is quite nuanced. Currently, most exchanges across the world consider that crypto futures (including perpetual futures), as a derivative instrument, should not be classified as VDA. Crypto futures are financial contracts that reference and derive value from VDA; they are not classified as VDA themselves. Therefore, the 1% TDS applicable on transfer of cryptocurrencies under Indian regulations is not applied to crypto futures (including perpetual futures) by exchanges.”
Baid explains further the reason for this stance by crypto exchanges. “Most exchanges that offer futures trading require margin payments to be made in USDT (a stablecoin) rather than cash. This means that transferring USDT for margin payments incurs a TDS liability.”
For reference, USDT is a crypto stablecoin that is pegged 1:1 to the US dollar. You can learn more about USDT here – https://tether.to/en/transparency/?tab=usdt
F&O cryptocurrencies are taxed as business income, while normal crypto income is taxed at the same rate as speculative income
The new ITR forms for FY 2023-24 include a separate section titled Schedule – Virtual Digital Assets (VDA). This schedule should be used to declare your gains from all virtual digital assets. However, crypto F&O transactions may not be classified as VDA, experts say.
According to Nishant Shah, Partner, Economic Laws Practice (ELP):
- A cryptocurrency transaction is taxable at a rate of 30% under Section 115BBH if “income is derived from the transfer of VDA”.
- Since F&O does not involve the transfer of crypto assets, gains from crypto F&O will be taxed as ordinary business income under the current income tax brackets.
“Section 115BBH imposes a flat tax of 30% on income derived from the transfer of VDA (including crypto). However, crypto futures are distinguished from VDA. Moreover, perpetual crypto futures involve only the exchange of initial and variable margins without any waiver or extinguishment of rights, which means they do not meet the transfer criteria outlined in Section 115BBH. As a result, crypto futures (including perpetual futures) may escape the ambit of strict tax obligations such as 1% TDS, 30% flat tax rate, and inability to set off losses,” says Baid of BTG Advaya.
“A tax rate of 30% plus applicable surcharge and cess of 4% has been introduced through the Finance Act, 2022 for taxpayers having income from transfer of VDA. This cannot include crypto F&O transactions since settlement in crypto F&O is done through methods other than actual delivery. Hence, crypto F&O transactions can be classified as business income,” says Sheth of BDO India.