In these blogs and in my discussions with clients the topic of cryptocurrencies has been raised on a regular basis. The fact is, whether you think this is a good investment opportunity or not, the South African Revenue Service (SARS) is sharpening its focus and intention to ‘mine’ it for tax revenue – as is within its rights. This is also not a new thing – SARS has been warning us for years.
Giving credit where credit is due
André Bothma, a tax consultant and tax content creator at BankerX, has written a good article that can be read here:
I will be drawing heavily on his article to highlight some of the important points I want my clients and anyone who reads these blogs regularly to pay particular attention to.
Some misconceptions about cryptocurrency and tax
- Cryptocurrency is not ‘real’ – many people believe that, since these currencies do not have the same ‘physical’ presence as coins in your grandpa’s pocket, it cannot be taxed in the same way.
South Africa’s Income Tax Act sees these cryptocurrencies as financial instruments – since you can pay people and buy stuff with it, all the normal tax provisions that apply to more traditional financial instruments will also apply.
- You will only pay tax once you convert cryptocurrency to a traditional currency. The latter is often referred to as ‘fiat currency’. According to Investopedia, ‘Fiat money is government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it.
As SARS sees cryptocurrency as functioning like traditional currency, you will be taxed the same.
- If the currency is not held in the country or transactions do not take place in South Africa it cannot be taxed here. The thing is YOU still live here and the benefits, gains, and losses you make affects your ‘bottom-line’ here. If you score, SARS wants some.
Intention, intention, intention
Bothma states that South Africa is among many countries that consider most movements of cryptocurrency as taxable events. He stated that it is up to taxpayers to prove that their intention matches their actions, and it is through your actions NOT your declarations that it will become clear to SARS what your intentions are.
- Are you in the game for the long-haul?
If you buy cryptocurrency with the aim of making a long-term investment, your reserves would be seen as capital assets. This means that Capital Gains Tax will apply. Currently, this stands at 7.2% to 18% for individuals, and 22.4% for companies.
- Are you into the thrill of the chase?
If you make trades between different types of cryptocurrency even if it seems to be to the same value (exchanging Bitcoin for Ethereum for example) this may be considered speculation. Your reserves are seen as ‘trading stock’ and your actions will be interpreted as an effort to participate in a ‘scheme of profit-making’.
In simpler terms, it will be viewed in the same way as if you were selling one share to purchase another because you think the new share has a better chance of showing positive returns.
The Tax Man will see it in the same way as if you sold that bitcoin for rand and then used that rand value to buy Ethereum. Any profits are taxed at normal income tax rates – 18%–45% for individuals, and 28% for companies.
As Bothma rightly points out: the obvious problem with exchanging crypto to crypto is that this triggers a tax event, but not necessarily an increase in your cash-flow. “So, to pay the tax, you’ll need to pay it from whatever cash you do have. SARS doesn’t care,” he said.
Two important drawbacks
- Cryptocurrencies do not benefit from the ‘three-year rule’. If you hang onto a share for three years it will be seen as a capital asset and therefore attract the lower tax rates associated with traditional capital assets. Not so in this case.
- Conventional brokers will handle all your tax calculations. All you need to complete your tax return will be served to you on a platter (it may not be a silver platter but at least it can be a paperless one) in the form of a completed IT3c document. If you are a trader or investor in cryptocurrency, you must do all the work yourself. It is a lot of painstaking work that will cost you a fair bit of time.
Using cryptocurrencies as, well, currency
- A means to pay
Payments for goods or services is treated the same as if you were selling something to buy another. This makes it a taxable event.
- Being paid
It still is affecting your bottom-line, as gains and losses in crypto is seen as the same as traditional gains and losses, so you must include this in your taxable income
- It is important to note that when SARS come knocking you are not only liable for the tax payable for that tax year. You will also have to cough up any taxes not previously paid. In other words, the law will be applied retrospectively as well!
- You can lie but you cannot hide. SARS has the technological expertise (and especially in a year like this) the determination to sniff out any additional revenue owing to them. You will pay for your sins to the tune of between 10% and 200% of the tax liability, depending on the severity of the case.