The SA Revenue Service is quite keen on figuring out who has made money off bitcoin and similar tokens in South Africa. High-net-worth individuals, offshore investors and cryptocurrency investors have explicitly been targeted as areas likely to yield much of the extra tax sought to be collected by SARS off the back of this additional budget allocation.
Depending on how and why the trades are conducted, you can be taxed on the proceeds derived from cryptocurrencies in two ways: Capital Gains Tax or Income Tax.
It is important to differentiate between a short-term gain, where the asset is held for less than a year and taxed at a higher marginal tax rate, and a longer-term gain where the sale will be taxed at the more favourable rate for long-term capital gains.
Capital Gains Tax
SARS view cryptocurrencies as an asset class/property, like your car or house, and not a currency.
A capital gain is a rise in the value of any asset held, whether it be stocks, real estate, or in this case, ownership of cryptocurrencies. A capital gain is only realised from a tax perspective when the asset is sold.
Some crypto transactions could be deemed to be capital in nature and thus liable only for capital gains tax. Merely holding cryptocurrencies in a wallet at year-end is not a taxable event, however, it is a taxable event when you sell your holdings and realise a capital gain or loss.
If you buy and hold crypto for an extended period and then sell at a profit, capital gains tax (CGT) will apply (your capital gains get added to your annual pre-tax income. The CGT rate can range from 7.2% to 18% depending on the tax bracket you are in.).
Income Tax
If you are making profits from trading crypto, this will be deemed as income and taxed at your marginal tax rate (on a sliding scale up to a maximum of 45%).
Other transactions could be deemed to be revenue-earning in nature and would thus be taxed according to the taxpayer’s normal tax rate as per the tax tables.
Should I Declare My Cryptocurrency Income?
SARS has already begun asking for information on crypto transactions on audit letters issued to taxpayers, and this means that non-compliant taxpayers will either have to lie, and risk incurring further penalties and back tax later, or reveal their trading history. Not providing accurate answers constitutes a criminal offence.
Many crypto owners are concerned that local and overseas exchanges will share information with SARS. There is no legal requirement by exchanges to report customer trade history to SARS but will generally do so, should SARS demand that information. Crypto investors should be aware of the Common Reporting Standards where tax authorities worldwide share information – which means your offshore crypto transactions may well be reported back to SARS.
In addition, SARS is investing heavily in its IT capabilities which will enable it to analyse financial and transaction data more effectively and identify transactions in and out of crypto platforms. Using foreign bank accounts is not a solution either because South Africa is a party to numerous agreements which enable automatic reporting between jurisdictions.
In Summary
Beyond this, there are vast areas of uncertainty. SARS has yet to issue specific guidelines on the treatment of crypto, but it is starting to pay closer attention to this emerging asset class and further guidelines are expected in due course.
IQ Accounting specialises in taxation compliance services. Should you require support with your personal or business cryptocurrency tax matters, feel free to contact us.