The South African Revenue Service (SARS) as well as the South African Reserve Bank (SARB) through existing working groups, and international exchanges of information, have reiterated their stance on the eradicating of non-compliance and this should be no different when it comes cryptocurrency.
This is according to Tax Consulting SA.
The misconception amongst taxpayers is that crypto profits or gains fall outside the South African tax net has been addressed on numerous occasions.
Taxpayers need to be aware that crypto-related activities do carry with them stringent reporting requirements, including declaration and payment of taxes due on the benefits derived thereon.
Whether you are a trader (a person who holds an asset as trading stock, with the primary intention of selling at a profit) or an investor (a person who holds an asset with a longer-term intention, not specifically for the selling that asset at a profit), here’s what you need to know about cryptocurrency and taxes.
SA classification of crypto assets
Within South African tax law, crypto assets are considered financial instruments under the Income Tax Act which means that any profits from crypto assets may fall within the tax net and be subject to disclosure and possible liability towards SARS.
While this disclosure may simple in theory, in reality it is more complicated.
According to Tax Consulting SA, cryptocurrency transactions are subject to various tax regulations, including capital gains tax, income tax, and even VAT in some cases.
Plus, the rules around cryptocurrency taxation are constantly changing, with different jurisdictions interpreting the law in different ways.
If your crypto assets have been growing in value, it is crucial that you heed the warning that SARS is actively keeping track of these developments.
The stance from Sars about crypto asset taxation
The Taxation Laws Amendment Act, 23 of 2020 (“TLAB”) illustrates 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.”
According to Tax Consulting SA, under South African domestic law, a crypto asset is not considered currency, but rather to have either a capital, or revenue nature, circumstance dependent.
This means that normal income tax rules will apply 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, depending on their circumstances.
Knowing your obligations
The misconception in the crypto-community is that a “taxable event” only occurs upon the disposal of a cryptocurrency asset, which results in realisation of “real world money” profit / gain.
However, any sale, exchange cryptocurrency asset for cryptocurrency asset, 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 cryptocurrency asset being disposed of, can be considered to be a capital asset, or trading stock in nature.
Tax Consulting SA said that if the correct capital intent, together with objective external factors are shown, taxpayers will be subjected to only Capital Gains Tax.
Capital Gains Tax 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 and they will be taxed at marginal rates applicable to individuals (up to 45%) or companies (27%).
Following good crypto returns, it may be tempting 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
Tax Consulting SA said that those who hold or have ever held cryptocurrency should not assume that historical non-declaration means that SARS will not look to tax these profits in future.
The assumption that SARS cannot go back more than five years should also be avoided
According to Tax Consulting SA, SARS is within their rights to look into all historical transactions, where a taxpayer has failed to disclose material facts to SARS, has committed fraud, or made misrepresentations.
Where a person fails to declare their gains or losses to SARS, this is tantamount to non-compliance and punishable by means of a fine or imprisonment.
SARS could also raise an additional assessment and impose interest and penalties.
Taxpayers should be weary of simply assuming SARS will not find out – given the uptick of the compliance drive, exchange of information and enhanced AI processes could expose such non-declaration.
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.
This is because the South African Reserve Bank authorisation on an Advanced Trading Model would be needed, and 9/10 times it has not been obtained.
Get help
Due to the uncertain nature of crypto-asset transactions, you should 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.
Should SARS have already contacted you on any inaccuracy or concomitant liability arising from your cryptocurrency transactions, then it should be addressed by a qualified tax specialist or tax attorney who can give you advice on an appropriate solution.
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