The South African Revenue Service (SARS) and the South African Reserve Bank (SARB) through existing working groups, and international exchanges of information, have reiterated their already strong stance on eradicating non-compliance. This includes a keen focus on crypto asset taxation and rectifying historic taxpayer issues of non-declaration of crypto related profits or gains, albeit without providing firm guidance to the average taxpayer.

The historically common misconception amongst taxpayers, that crypto profits or gains fall outside the South African tax net has been addressed by the revenue collector and exchange control gate keeper on numerous occasions. In short, taxpayers must be aware that crypto-related activities, even though on-platform, and perhaps not realised for fiat gain, do carry with them stringent reporting requirements, including declaration and payment of taxes due on the benefits derived thereon. 

If you find yourself fitting into either the investor or trader categories, here is what you need to know!

South Africa’s Classification of Crypto Assets

In the realm of South African tax law, crypto assets are considered financial instruments under the Income Tax Act. This means that any profits resulting from dealing in crypto assets may fall within the tax net and be subject to disclosure and possible liability towards SARS.

As simple as this disclosure may sound in theory, unfortunately, the reality is more complicated. Cryptocurrency transactions are subject to a range of tax regulations, including capital gains tax, income tax, and even VAT in some cases. Moreover, the rules around cryptocurrency taxation are constantly evolving, with different jurisdictions interpreting the law in different ways.

If your crypto assets have been growing in value, it is important to heed the warning that SARS is actively monitoring these developments.

Where to from here?

SARS’ Stance on Crypto Asset Taxation

The Taxation Laws Amendment Act, 23 of 2020 (“TLAB”) concretized the classification of a “crypto asset”, which, according to SARS, can be described as:

“a digital representation of value that is not issued by a central bank, but is traded, transferred and stored electronically by natural and legal persons for the purpose of payment, investment and other forms of utility, and applies cryptography techniques in the underlying technology.”

As we now know, under South African domestic law, a crypto asset is not considered currency, but rather to have either a capital, or revenue nature, circumstance dependent. What this means is that normal income tax rules will find application with crypto assets, and traders would need to declare any losses or gains per tax year. This will fall either under “gross income”, or “capital gain”, circumstance dependent.

Knowing Your Obligations – Capital or Revenue

A common misconception amongst the crypto-community is that a “taxable event” only occurs upon the disposal of a CA, which results in realisation of “real world money”, aka a fiat currency profit / gain. In reality, any sale, exchange (CA for CA), or disposal of crypto assets is likely to be considered a taxable event.

The key differentiating factor, which could result in a massive tax liability differential, is if the CA so-disposed, can be considered to be a capital asset, or trading stock in nature. If the correct capital intent, together with objective external factors are shown, taxpayers will be subjected to only Capital Gains Tax. Like selling a house, CGT liability arises if the profits received from the sale of crypto assets exceed the initial cost, and is at a lower rate of taxation than if the proceeds of sale were deemed to be normal income.

If SARS views the profits from crypto dealings as income, they will be taxed at marginal rates applicable to individuals (up to 45%) or companies (27%). This is particularly relevant for frequent traders whose crypto activities might push them into higher tax brackets.

Following good crypto returns, it may be tempting to “cash-in” on profits to splurge on something new and shiny. But bear in mind that SARS is strengthening its crackdown on crypto-tax compliance, and demands its share.

Historical non-compliance

Those who hold, or have ever held, crypto, should certainly not assume that historical non-declaration means that SARS will not look to tax these profits in future. SARS has made it very clear that no stone will be left unturned in fulfilling their mandate to collect revenue, by whatever means necessary.

The assumption that SARS cannot go back more than five years should also be avoided – SARS is well within its rights to look into all historical transactions, where a taxpayer has failed to disclose material facts to SARS, has committed fraud, or made misrepresentations.

Assuming a crypto investor or trader is in SARS’ good books, they are still not out of the woods yet, especially where foreign trading platforms are involved, as the South African Reserve Bank authorisation on an Advanced Trading Model would be needed, and 9/10 times, has not been obtained.

Help Us, Help You

Due to the intangible and uncertain nature of crypto-asset transactions, it is market best practice to seek the guidance of a professional tax specialist. This will aid in not only ascertaining the classification of specific crypto assets and transactions, but also assist you in ensuring your tax submissions to SARS are wholly accurate.

Not only will this place you in a better position of knowledge, but when the correct tax strategy is followed, pro-actively, it will ensure both historic and current compliance with SARS.

Should SARS have already contacted you on any inaccuracy or concomitant liability arising from your cryptocurrency transactions, this should be immediately addressed, by a qualified tax specialist or tax attorney. This professional intervention will not only serve to safeguard you against SARS implementing punitive measures, but also being specialists in their own right, you will be correctly advised on the most appropriate solution to ensure your tax compliance.

Written by Jashwin Baijoo, Head of Strategic Engagement & Compliance at Tax Consulting SA; and Micaela Paschini, Tax Attorney at Tax Consulting SA