Along with other investors, investors in crypto assets need to declare their profits to the taxman and pay tax on those earnings in one form or another. This is the case even if the crypto is on an offshore platform, because offshore earnings for South African tax residents are subject to local taxes.
In October last year, the South African Revenue Service (SARS) released a statement reminding South African crypto holders of their tax obligations. It said: “SARS has noted the phenomenal growth of the use of various digital currencies by many South Africans. More than 5.8 million South Africans hold a crypto asset, with Southern Africa boasting the largest uptake of Bitcoin in the world. SARS is concerned that these crypto assets and trades are not being declared on the tax returns of taxpayers.”
Jashwin Baijoo, Associate Director and Head of Strategic Engagement and Compliance, and Micaela Paschini, Team Lead: Tax Legal at Tax Consulting SA, say SARS has established a specialised crypto unit that has access to information from local crypto exchanges and is benefiting from international cooperation in pursuing non-compliant investors.
“Empowered to open historical tax periods and conduct in-depth audits, SARS’s Specialised Crypto Unit is making inroads into uncovering non-compliance at all levels. This ranges from a standard verification to extreme cases where SARS recategorises proceeds from crypto disposals – from capital gains to income,” Baijoo and Paschini say.
Gains or income?
You can be taxed on crypto-assets in one of two ways: either on capital gains if you sell them during the tax year or on income derived from trading or mining.
1. Capital gains tax (CGT). Here you get off relatively lightly: individuals have an annual exclusion of R40 000, after which 40% of any gain must be included in your taxable income, which is taxed according to the income tax tables. The most you will effectively pay on the gain, if you are in the top marginal tax bracket of 45%, is 18%.
2. Revenue as a trader. If you profit regularly from trading or mining crypto assets, then your profit (minus qualifying expenses you incurred earning that profit, such as your fibre network costs) must be declared as revenue and added in full to your taxable income.
If SARS accesses your transaction records and decides you are not an investor liable for CGT but a trader liable for income tax and “recategorises” you, the cost could be substantial.
“Recategorisation can have a staggering impact on one’s tax bill, as the shift is from an effective CGT rate of 18% for individuals to being subject to one’s marginal rate of tax, which is 45% at the top end of the table,” the Tax Consulting SA experts say.
Investor or trader?
What determines whether you are a crypto-asset investor or trader? In a presentation to financial advisers a few years ago, Diane Seccombe, national head of taxation at the Mazars Academy, said the answer was not a simple one. This is because crypto-assets have little use besides you trying to profit from them, unlike investments that provide an income stream.
She said that if you are speculating in crypto-assets, buying and selling them relatively frequently, the answer is clear: you must declare your profits as revenue.
“But if you are genuinely diversifying into crypto and have other investments in your portfolio, and are dealing with your crypto assets and other investments in the same way, then you can argue that it is a capital asset,” Seccombe said.
Note that if you sell your crypto at a loss, you still need to declare it, because the loss can be offset against capital gains on other assets or ring-fenced to be offset against capital gains in future years.
Baijoo and Paschini say the burden of proof lies on you, the taxpayer. “Taxpayers must convince SARS that their crypto holdings are capital in nature – a near-impossible task without meticulous records. Otherwise you may find yourself at the mercy of SARS’s interpretation, with little room to push back,” they say.
