Budget 2024: Why crypto F&O investors are happy - No STT, no TDS, no 30% tax
Jul 30, 2024
Synopsis
Budget 2024: Crypto future and options investors are happy because the budget did not impose any TDS, STT and neither section 115BBH (30% tax) provisions on it. While at the same time Budget 2024 increased STT on stock market future and options (F&O). Many now believe crypto F&O transactions are now more attractive than stock and index F&O.
Budget 2024 increased the Securities Transaction Tax (STT) on all futures and options (F&O) contracts traded on recognised stock exchanges. However, this is not applicable to cryptocurrency F&O transactions. Added to this, some crypto exchanges have taken the stance that no tax deducted on source (TDS) is to be levied on crypto F&O transactions. Investors might find crypto F&O transactions attractive because they might not be subject to the 30% flat crypto gains tax, there is no TDS in certain exchanges, and there is also no STT.
While the Budget 2024 introduced changes to the STT rates for F&O transactions in securities, these changes do not apply to crypto transactions. "While the Budget 2024 introduced changes to the STT rates for F&O transactions in securities, these changes do not apply to crypto transactions, as crypto transactions are categorised as commodities. Therefore, the rules for crypto F&O transactions regarding TDS and section 115BBH tax rate remain the same, and no STT is charged on these transactions," says CA Abhishek Soni, co-founder, Tax2Win.
When is TDS required to be deducted from crypto, VDA transactions
According to Section 194S, 1% TDS is deducted on all VDA transactions from July 1, 2022.
"A new section 194S was introduced in relation to TDS on payment while transferring VDAs via the Finance Act, 2022. By virtue of the said provision, any person making payments (exceeding the prescribed threshold) to any resident for transfer of VDAs shall be responsible for deduction tax at source at the rate of 1% of the value of the VDAs," says Deepa Sheth, Partner, Corporate Tax, Tax & Regulatory Services, BDO India.
However, there is an ambiguity in interpreting the law about TDS deduction on crypto F&O transactions. As per Nithin Kamanth's social media post on July 10, 2024, "On one side, SEBI is working on restricting F&O, but on the other side, this crypto F&O ad is on the front page (of a newspaper). By the way, all these platforms have taken the stance that the 1% TDS rule doesn't apply to crypto F&O. For regular crypto transactions, 1% of the transaction is deducted as TDS. Something for @nsitharaman and @FinMinIndia to check out."
"Crypto FNO is not allowed in India and if crypto FNO is taking place on a platform, trading platform, which is not based in India , is totally illegal as per RBI and will require penal action 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 behind TDS not being deducted from crypto F&O transactions?
"Derivatives (i.e., Futures and Options) are financial instruments with no intrinsic value and thereby derive their value from the performance of other financial assets such as index, interest rate, equity shares, cryptocurrency etc. Crypto derivatives does not fall within the purview of Virtual Digital Assets (VDAs) as it is not accompanied with a promise or representation of having inherent value, or functions as a store of value or a unit of account and the settlement is done 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 such opinion is not supported by any clarification from the Income Tax Department and is based on the interpretation of the bare provisions as aforementioned," says CA (Dr.) Suresh Surana.
Sheth explains how a F&O crypto transaction works and why the specific some exchanges adopt no TDS stance. "TDS is applicable on transfer of VDAs. However, in the case of F&O, the trader speculates on the price movements of an underlying VDA without actually owning it and therefore some platforms have adopted a view that crypto F&O transactions, perpetual contract transactions or otherwise, are not subject to TDS," she says.
According to CA Amit Kumar Baid, Head of Tax, BTG Advaya, "The Indian tax landscape for crypto futures is quite nuanced. Currently, most of the exchanges across the world are taking a view that crypto futures (including perpetual futures), being a derivative instrument, should not be classified as VDAs. Crypto futures are financial contracts that reference VDAs and derive their value from them; they themselves are not classified as VDAs. Consequently, the 1% TDS applicable on transfer of cryptos under Indian regulations is not applied to crypto futures (including perpetual futures) by the exchanges."
Baid further explains the reason behind this stance of crypto exchanges. "Most exchanges that offer futures trading require margin payments to be made in USDT (a stable coin) rather than in cash. This means that transferring USDT for margin payments does attract TDS liability."
For reference purposes, USDT is a crypto stablecoin whose value is pegged to the United States Dollar in the ratio 1:1. You can read more about USDT here-https://tether.to/en/transparency/?tab=usdt
Crypto F&O are taxed as per business income, while normal crypto income is taxed at par with speculative income tax rate
The new ITR forms for FY 2023-24 consist of a separate section called Schedule - Virtual Digital Assets (VDA). This schedule must be used to report your gains from all virtual digital assets. However, crypto F&O transactions might not be classified as VDA, as per experts.
According to Nishant Shah, Partner, Economic Laws Practice (ELP):
A transaction in crypto is taxable at 30% rate pursuant to Section 115BBH if "any income is earned from transfer of VDAs".
Since, F&O does not involve transfer of crypto assets, gains from crypto F&O will be taxed as regular business income under the current slabs applicable for income tax.
"Section 115BBH imposes a flat 30% tax on income from transfer of VDAs (including cryptos). However, crypto futures are being distinguished from VDAs. Additionally, perpetual crypto futures involve only the exchange of initial and variable margins without the relinquishment 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 fall outside the scope of the stringent tax obligations such as the 1% TDS, the flat 30% tax rate, and the inability to offset losses," says Baid from BTG Advaya.
"Tax rate of 30% plus applicable surcharge and 4% cess was introduced by the Finance Act 2022 for taxpayers having any income from transfer of VDAs. The same may not include crypto F&O transactions since settlement in crypto F&O occurs through methods other than actual delivery. Consequently, the crypto F&O transactions may be categorised as business income," says Sheth from BDO India.
[The Economic Times]
