“The future of money is digital currency”Bill Gates, Co-founder of Microsoft
Cryptocurrencies have been around for over a decade, with the first and most famous one – Bitcoin – launched in 2009. Since then, many other cryptocurrencies have been created and supported in the market, including for example Ethereum, Litecoin, Dogecoin and Bitcoin Cash.
Regulators have been slow in responding to the rapid fintech developments behind cryptocurrencies. However, further cryptocurrency regulation is certainly on its way, and the Intergovernmental Fintech Working Group (IFWG), a group of South African financial sector regulators, published a policy position paper on crypto assets to provide specific recommendations for the development of a regulatory framework.
In the meantime, however, many cryptocurrency owners may be unaware that their cryptocurrency gains will most certainly be taxable by SARS – and in the year of assessment in which income or gains are received by or accrue to the taxpayer – not only if or when the cryptocurrency is withdrawn and converted into legal tender.
What’s the sudden spotlight on cryptocurrencies?
A number of recent developments have catapulted cryptocurrencies into the spotlight.
The first was the Bitcoin boom over the last year. Having maintained a price under $10,000 for years, excluding two peaks in December 2017 ($13,000) and June 2019 ($12,000), Bitcoin’s price started to skyrocket in September 2020 as big-name companies such as PayPal, Mastercard and Square began to accept it.
Early in 2021, the price of Bitcoin reached a staggering $60,000, following Tesla’s announcement that it had acquired $1.5 billion worth of Bitcoin and the public listing of US cryptocurrency platform Coinbase Global on the Nasdaq. In February, Bitcoin breached the $1 trillion market capitalisation mark.
Local Bitcoin investors would have seen the price of their bitcoin jump from under R100,000 in March 2020 to just under R430,000 at the end of 2020 to almost R1 million in April 2021, doubling in value in just a few months.
Many South Africans started investing in cryptocurrencies during the boom, with a global crypto platform operating locally saying it had registered more than a million new cryptocurrency accounts in under two months, South Africa being in the top four highest growth locations.
SARS’ scrutiny not surprising
It is not surprising that these substantial gains and the fast-growing number of South African investors in cryptocurrencies have come under specific scrutiny from SARS. It presents an opportunity to collect substantial taxes from a previously untapped source at a time when all other options for tax increases and new taxes have been exhausted.
In addition, earlier this year, R3 billion was allocated to SARS in the Budget to improve its ability to track undeclared assets and income, including a dedicated unit to uncover “undisclosed offshore assets, including crypto-assets such as bitcoin” and other cryptocurrencies.
Unfortunately, very few South Africans holding cryptocurrency are likely to be aware of the tax liability they could be facing.
So, while cryptocurrency platforms are not yet legally required to report on their clients and while SARS boosts its tracking abilities, our tax authority has simply begun asking for information on crypto transactions in audit letters issued to taxpayers – even to taxpayers that have never traded in cryptocurrencies.
The information requested includes the purpose for which the taxpayers purchased cryptocurrency, as well as bank statements, and a letter from the trading platform(s) confirming the investments and the relevant trading schedules for the period.
Thanks to recent legislative changes that have made it a criminal offence for a taxpayer to willfully fail to submit a document or information as requested by SARS, or to make a false statement to SARS, non-compliant taxpayers could be liable to a fine or imprisonment for up to two years – or up to five years for attempted tax evasion or obtaining an undue refund.
In 2018 SARS issued a media statement confirming that the existing tax framework and normal tax rules will apply to cryptocurrencies and that affected taxpayers are expected to declare cryptocurrency gains or losses as part of their taxable income.
It said that cryptocurrencies such as Bitcoin are considered by SARS to be “assets of an intangible nature”, and that capital gains tax or normal tax may apply, depending on whether you are investing for the long term or trading actively for short-term gain. SARS will likely consider cryptocurrency-related gains to be revenue in nature and the onus will be on the taxpayer to prove otherwise.
For long-term investors, cryptocurrency is deemed “capital assets” and gains will be taxed at Capital Gains Tax rates – up to 18% for individuals and 22.4% for companies. The purchase price of cryptocurrency is deemed to be the price paid on date of purchase.
Active trading will ensure your cryptocurrency is considered “trading stock”, with the income “received or accrued” falling under the definition of “gross income” in the Income Tax Act and profits taxed at normal income tax rates, between 18%–45% for individuals and 28% for companies.
Cryptocurrencies income can be “earned” in various ways, all of which are subject to normal tax.
- A cryptocurrency can be obtained by so-called “mining”. According to SARS, until it is sold or exchanged for cash, cryptocurrency obtained in this way is held as “trading stock” that can then be realized through an ordinary cash transaction, or through an exchange transaction.
- Cryptocurrency may be received as income by a self-employed independent contractor for performing services; or received as remuneration or wages for services from an employer.
- Cryptocurrency may be accepted as payment for goods or services. Where goods or services are exchanged for cryptocurrencies, such a transaction is deemed to be an exchange transaction and the usual exchange transaction rules apply.
- Investors can exchange local currency for a cryptocurrency (or vice versa) by using cryptocurrency exchanges, or by private transactions.
- If a trade is made between two cryptocurrencies, for example Bitcoin and Ethereum, the profits are also taxable.
Failure to declare cryptocurrency holdings, income and gains could result in interest, penalties and criminal prosecution.
What you should do now
(Remember to get expert advice specific to your circumstances!)
- SARS says that the responsibility rests with taxpayers to declare all taxable income in respect of cryptocurrency in the tax year in which it was received or accrued. If you mined cryptocurrency; bought any cryptocurrency; exchanged cryptocurrency for another cryptocurrency; or were in any way paid in cryptocurrency, it must be declared.
- As with other asset classes, it is important to understand cryptocurrency investments and the attendant tax obligations, and to plan accordingly. A buy-and-hold strategy is more tax efficient, but professional tax advice is recommended for each individual case.
- If you have received a request for information from SARS – whether or not you have traded in cryptocurrency – immediately contact your accountant for professional assistance.
- Whether or not you have received communication from SARS, if you have not disclosed cryptocurrency holdings, income gains and losses, contact your accountant for specialist tax advice.
- Keep records of all transactions – according to SARS conventional receipts and/or invoices are acceptable proof of purchase and sale price.
- Use software to track crypto transactions – cryptocurrency platforms do not provide SARS compliant tax certificates such as the IT3c provided by financial services institutions for tax returns.
- Declare cryptocurrency holdings, income, gains and losses correctly –
- SARS has already included questions about cryptocurrency investments in the capital gains tax portion of tax returns;
- The income or market value thereof forms part of total taxable income in respect of the year of assessment on a provisional tax return (IRP6);
- Taxable income in the source code or tax return container field provided on the ITR12 form.
- Individuals can make use of the annual Capital Gains Tax exclusion of R40,000.
- Claim deductions – deductions against cryptocurrency income are allowed if they meet the requirements of the Income Tax Act, including whether expenditure is incurred in the production of income or for trade purposes – for example costs relating to computers, servers, electricity and internet service provider charges.
- Offset losses – losses on cryptocurrency bought as investments will count as capital losses. However, it can only be deducted from capital gains. If there are no capital gains to deduct losses from, the losses can be carried over to the next tax year. You will be well advised to obtain expert tax guidance in this regard.
The risks and consequences of willfully or negligently failing to make full and true declarations to SARS, or to submit documents or information requested by SARS are now substantial, so ask us at Emma Pardoe Chartered Accountant for advice specific to your circumstances!