The tax effects of your crypto assets

Cryptocurrency, a crypto asset,  is not considered a currency for the purposes of South African income tax, it is regarded as an asset and SARS applies the normal income tax rules to it. The South African Revenue Service does not have a separate tax regime for cryptocurrencies, and depending on the activity and the tax event, the value is calculated and adjusted in the tax filing as either income or capital gains and taxed accordingly.

A crypto asset is a digital representation of value that is not issued by a central bank, but is traded, transferred and stored electronically by natural and legal persons for the purpose of payment, investment and other forms of utility, and applies cryptography techniques in the underlying technology.

Legislatively, SARS is granted a wide range of collection powers in terms of the Income Tax Act, including a requirement for third-party service providers to submit financial data. Enforcement and audit processes are confidential and not shared with members of the public.

The onus will be on the taxpayer to declare all crypto assets’ gains or losses as part of their taxable income in the tax year which it is received or accrued. The nature of trading vs investment is very important when determining which of the above criteria will be applied with regards to your crypto assets’ income or gain.

Taxpayers are also entitled to claim expenses associated with crypto assets accruals or receipts, provided such expenditure is incurred in the production of the taxpayer’s income and for purposes of trade. Base cost adjustments can also be made if falling within the CGT paradigm. Gains or losses in relation to crypto assets can broadly be categorised with reference to three types of scenarios, each of which potentially gives rise to distinct tax consequences: Crypto assets can be acquired through so called “mining”. Mining is conducted by the verification of transactions in a computer-generated public ledger, achieved through the solving of complex computer algorithms. Investors can exchange local currency for a crypto asset (or vice versa) by using crypto assets exchanges, which are essentially markets for crypto assets, or through private transactions. Goods or services can be exchanged for crypto assets. This transaction is regarded as a barter transaction. Therefore the normal barter transaction rules apply.

Allowable Costs

SARS does have a few allowable costs in its tax regime that can be extended to digital tokens. Expenses associated with acquiring or disposing of tokens can be incorporated into the base cost. Similarly, any losses can be claimed and adjusted in either the income tax or CGT category at the time of tax filing.

Other Taxes

At the moment, there are no other taxes implemented on crypto activities in South Africa. However, the regulatory framework is still developing and this could change in the future.

With the tax year in South Africa running from 1st March to 28/29 February, each working citizen is required to submit their taxes for all income and gains generated during this cycle.

Individuals are required to submit their complete financial report on the Income Tax Return form (ITR12). Although all regular crypto income taxes come under the gross income, there is a separate section for capital gains and losses for cryptos. Apart from this, all unsold crypto coins are also required to be declared in the filing.

Keep a detailed record of all crypto buying, trading, and acquisitions made. This will help in determining whether you have to pay income tax or CGT, along with how much is payable.

Many wallets do keep a track of your assets and their worth, but this can be problematic especially if there is a lot of activity or you are using fiat currencies other than RAND. The best option is to keep your own detailed record.

The Taxation Laws Amendment Act (TLAB) of 2018 amended the definition of a “financial instrument” in the Income Tax Act to include any cryptocurrency (amended by the 2020 TLAB to refer to crypto asset rather than cryptocurrency). Consequently, crypto assets included in closing stock are valued at cost and may not be written down below cost. The 2018 TLAB also added the acquisition or disposal of any cryptocurrency (likewise changed to crypto asset) to the list of suspect trades for purposes of ringfencing assessed losses for individuals. From a VAT perspective, the 2018 TLAB added the issue, acquisition, collection, buying or selling or transfer of ownership of any cryptocurrency to the definition of exempt “financial services” in the VAT Act. The dealing in crypto assets itself therefore currently does not give rise to VAT. However, services related to such dealings may well give rise to VAT if the VAT registration threshold is met.

Some background info from SARS about crypto assets is given below:

The process to understand and document crypto assets in South Africa started in 2014:

2014: The initial public statement alerting the public to the risks of crypto assets was issued by National Treasury (NT) in 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).

2016: The Inter-governmental Fintech Working Group (IFWG) was established, comprising members from NT, SARB, FSCA and FIC. The objective of the IFWG is to foster fintech innovation by supporting an enabling regulatory environment and reviewing both the risks and the benefits of emerging innovations.

2018: SARS issued a media release to clarify its stance on the tax treatment of crypto-currencies.
SARS published a list of FAQs (reviewed in 2021).

2019: The National Credit Regulator (NCR) and SARS joined the IFWG.
The IFWG released a consultation paper on crypto assets. The consultation paper highlighted the perceived benefits and risks of crypto asset-related activities, as well as policy proposals for a regulatory framework.

2020: The IFWG released a position paper on crypto assets (updated 2021). The purpose of the position paper is to provide specific recommendations for the development of a regulatory framework for crypto assets, including suggestions on the required regulatory changes to be implemented.

2021: The position paper released in 2020 is being used as input into the proposed Regulations and a policy on crypto assets. Note that SARS is only one of many role-players in South Africa, and the South African Reserve Bank (SARB) is taking the lead in the formulation of these documents. Since the crypto industry is relatively new, SARB said it is in the process of developing its own set of rules that could allow its clients to transfer assets abroad. Until the regulation is fully established, it is illegal for crypto users to transfer funds abroad, according to SARB.

A future article will deal with Frequently Asked Questions (FAQs) about crypto assets based on the Intergovernmental Fin​tech Working Group’s (IFWG) consultation paper.

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