Taxation Laws Amendment Bill
Income Tax Act
Do you mine cryptocurrencies and/or trade in them? If so, there are tax implications to consider.
SARS is investing in its IT capabilities 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 party to numerous agreements which enable automatic reporting between jurisdictions.
The initial public statement on crypto assets1 was issued by National Treasury (NT) in 2014 as a joint initiative with the South African Reserve Bank (SARB), the Financial Services Board (now the Financial Sector Conduct Authority (FSCA)), the South African Revenue Service (SARS) and the Financial Intelligence Centre (FIC).
The public statement warned members of the public about the risks associated with the use of crypto assets for the purpose of transacting or investing, and advised users to take extreme caution in this regard. It further noted that no specific legislation or regulation exists for the use of crypto assets. Therefore, no legal protection or recourse is offered to users of, or investors in, crypto assets.
In 2016 the Intergovernmental FinTech Working Group (IFWG) was established, comprising members from NT, the SARB, FSCA and FIC. The aim of the IFWG is to develop a common understanding among regulators and policymakers of financial technology (fintech) developments as well as policy and regulatory implications for the financial sector and economy.
At the start of 2018, a joint working group was formed under the auspices of the IFWG to specifically review the position on crypto assets. The working group is represented by the members of the IFWG and SARS, and is referred to as the Crypto Assets Regulatory Working Group.
Cryptocurrency is not considered to be legal tender.
The risks to South Africa:
The risk with potentially the widest-ranging implications is the threat to central banks’ historical exclusive right to issue money and control the money supply, which ability has the benefit of ensuring an efficient monetary policy transmission mechanism. The risk posed by crypto assets to the monetary policy transmission mechanism is: should demand for crypto assets increase significantly, demand for fiat currency would decrease. In essence, this would lead to the creation of a parallel and ultimately fragmented monetary system.
The second risk posed by crypto assets pertains to financial stability. A further significant factor is that low amounts of selling and buying of crypto assets often result in large movements in price. Volatility is an indispensable part of the price discovery process of crypto assets.
The third pertinent risk is to the national payment system and, similar to the threat posed to monetary policy implementation, relates to the creation of a parallel and fragmented payment system.
Below are SARS answers to frequently asked questions.
- Is an individual who “mines” cryptocurrency as a trade or business subject to tax on the income derived from those activities? Such income is subject to normal tax. The person may be liable to register as a provisional taxpayer if the total taxable income received exceeds the tax threshold for the financial year.
- Should a taxpayer who receives cryptocurrency as payment for goods or services include, in computing gross income, the fair market value of the cryptocurrency? Yes, such income is subject to normal tax.
- Does cryptocurrency received by an independent contractor for performing services constitute self-employment income? Such income is subject to normal tax. The person may be liable to register as a provisional taxpayer if the total taxable income received exceeds the tax threshold for the financial year. Deductions are allowed if it complies with the general income tax principles, such as whether expenditure is incurred in the production of income or for trade purposes.
- Does cryptocurrency paid by an employer, as remuneration for services, constitute wages for employment tax purposes? Such income is considered to be remuneration for tax purposes and is subject to normal tax.
- Will taxpayers be subject to penalties for having treated a cryptocurrency transaction in a manner that is inconsistent with South African tax laws? Taxpayers may be subject to penalties, depending on the behaviour involved. See Chapter 16, and section 223 specifically, of the Tax Administration Act, 2011.
- What would be considered as acceptable proof of purchase and sale price? Conventional receipts and /or invoices will suffice.
- Can the purchase price be either the price paid on date of purchase or as with shares the average of the year? The purchase price is determined on the date of the earlier of receipt and accrual.
Cryptocurrency is not regarded as a share and therefore SARS does not treat it as the average for the year.
- How is SARS going to trace cryptocurrencies such as Bitcoin transactions? Legislatively, SARS is granted a wide range of collection powers in terms of the Income Tax Act. Enforcement and audit processes are confidential and not shared with members of the public.
- Does trace cryptocurrencies such as Bitcoin taxation apply retrospectively and the penalties to be imposed for non-compliance? Transactions involving cryptocurrencies follow conventional tax principles. Thus, penalties and interest will be charged as normal.
- Are the expenses incurred in cryptocurrencies such as Bitcoin trading tax deductible or not? Expenses incurred on cryptocurrencies are deductible on condition they meet all the requirements of the Income Tax Act.
- Cryptocurrencies such as Bitcoin is not a currency, nor an asset. How is it taxable? We share your view that Bitcoin is not a currency for purposes of South African income tax; however, it is regarded as an asset for income tax purposes or trading stock.
- How do you declare cryptocurrencies such as Bitcoin trading on my Provisional Tax return (IRP6)? The income or market value thereof forms part of total taxable income derived by the taxpayer in respect of the year of assessment for which the provisional tax is payable.
- How and where on the ITR12 form do I declare my cryptocurrency income? Depending on the facts and circumstances of your case, capital gains tax or normal tax may apply. The taxpayer will declare
such taxable income in the source code or tax return container field provided.
What is SARS’ view?
SARS Media Release
• Crypto earnings are/always have been subject to income tax and capital gains tax in South Africa.
• Normal income tax and CGT rules are flexible enough to apply to crypto transactions.
• The onus is on taxpayers to declare crypto transactions.
• The usual interest and penalties apply for non-disclosure / non-compliance.
• The existing “Voluntary Disclosure Programme” can be used to apply for waiver of penalties (not any unpaid tax itself, or interest thereon).
• The usual channels available for formal SARS guidance on tax.
SARS has confirmed that basic income tax and CGT principles apply.
• Cryptocurrencies regarded as assets of an intangible nature, not currency.
• Cryptocurrencies are classified as “financial instruments”).
• The basic tax treatment of cryptocurrency is similar to that of shares.
Buying and selling cryptocurrency:
• For purposes of trading – income tax treatment; or.
• For purposes of investing, i.e. as a capital asset – CGT treatment.
• It depends on the intention when buying, holding and selling, and detailed facts.
• The CGT rate lower is than income tax rate.
In terms of the TLAB Act:
o Cryptocurrencies to be included in definition of “financial instrument” for income tax purposes.
o Principles under the SARS media release mentioned above should broadly still be applicable.
o No definition for cryptocurrency has been proposed for income tax or VAT.
o Cryptocurrency is considered an exempt supply for VAT purposes and the vendor is not required to register as VAT vendor.
Dividends tax, withholding tax on interest and withholding tax on royalties
o There is no current withholding taxes as crypto returns currently do not qualify as dividends, interest or royalties.
Securities Transfer Tax
o There is no STT on cryptocurrencies.
The rates of taxation:
If your aim was to trade your digital assets for profit, then your cryptocurrency purchases become trading stock and the profits are taxed at normal income tax rates; i.e. 18%–45% for individuals, and 28% for companies.
If your intention was to invest for long term gains, then your crypto asset purchases become capital assets and gains will be taxed at Capital Gains Tax rates. These are much lower than normal tax rates; 7.2% to 18% for individuals, and 22.4% for companies.
When converting from cryptocurrency to fiat (legal tender, recognised currency): if you sell your digital assets and cash out then you pay either normal income tax or capital gains taxes, depending on whether you were trading or investing.
Exchanging one cryptocurrency for another: when exchanging one digital asset for another, such as buying ether with bitcoin (or vice versa) it’s a taxable event. It is considered a disposal for tax purposes and is treated the same as selling one share to buy another.
Making payments with cryptocurrencies: if you use your cryptocurrency to pay for goods, it is treated as selling the cryptocurrency to buy goods and services.
Receiving your income in cryptocurrency: if you receive your salary in cryptocurrency, or in exchange for goods or services you sold, you need to include it in your taxable income.
Mining cryptocurrency: the moment that you mine a crypto token the market value of that coin is added to your gross income. Expenses incurred as a coin miner can be deducted for tax purposes.
Author Craig Tonkin