Cryptocurrency investors could be the proverbial canary in the coal mine for tax in South Africa, says Thomas Lobban, legal manager of Tax Consulting South Africa.
In the 2021 budget review it was announced that SARS would allocate an additional R3 billion, to modernise its technology infrastructure and systems, expand and improve the use of data analytics and artificial intelligence capabilities, and participate meaningfully in global tax compliance initiatives.
“It is quite clear that SARS is aware of the current gaps in its information gathering resources and mechanisms, and is now embarking on a mission, specifically to kill the canary,” said Lobban.
“Further considering the comments of SARS commissioner, Edward Kieswetter, that SARS is building a digital, data-driven model and are increasingly using data analytics and machine learning to identify higher-risk taxpayers, there is little room for doubt that non-compliant cryptocurrency investors will soon run out of breathing room.”
Lobban added that SARS is establishing a dedicated unit for wealthy individuals and will be sending letters to the first set of taxpayers that their affairs are being moved over to this team in April.
“In this regard, undisclosed assets such as cryptocurrency, in particular, will be a big area of focus.”
When the bill comes due
There has long been a belief held by many taxpayers and advisors alike that cryptocurrency profits are only subject to capital gains tax – at a maximum effective rate of 18% for individuals – and that this is only levied when the profits are withdrawn.
This is simply not the truth, said Lobban.
“Further, there is a pervasive message being peddled in many quarters that cryptocurrency is subject to capital gains tax, if it was held for at least three years. This is an oversimplification at best.”
“Whether or not cryptocurrency will be defined as capital, that is therefore subject to capital gains tax, or as revenue in nature and subject to tax of up to 45%, must be determined on a case-by-case basis.”
Lobban said that there is no single measure for this. In most cases, SARS will consider a cryptocurrency-related profit to be revenue in nature and the onus is on the taxpayer to prove otherwise, he said.
“It is equally dangerous to assume that cryptocurrency was not subject to tax in the past, due to there being no guidelines.
“To be clear, cryptocurrency-related profits have always been taxable in terms of the law. The only difference is that SARS is late to the party, but do not be fooled – they are definitely here now.”
Don’t be the canary
While it is one thing to contemplate SARS’ actions in relation to cryptocurrency, it is something else entirely to already be squarely in the crosshairs, said Lobban,
“Following the 2020 tax year, SARS has already been sending audit letters to taxpayers requesting clarification and substantiating documentation in relation to their cryptocurrency investments.
“In many cases, this has been met with confusion on the part of the taxpayer concerned, where they have never held any cryptocurrency. On the other hand, however, it can be absolutely devastating to a historically non-compliant cryptocurrency investor.”
Lobban said that taxpayers in the latter category will find themselves in a quandary – either they are caught out for not having disclosed cryptocurrency in their returns, or they do not tell the truth to SARS in relation to the audit letter.
In either case, these taxpayers face not only penalties and interest for outstanding tax, but also potential criminal fines or imprisonment of up to five years.
“It is crucial that taxpayers, who have previously conducted any cryptocurrency transactions, regularise their tax affairs before being approached by SARS.
“This includes determining and settling any historic tax liability, and ensuring that the correct tax position is taken in each case. Alternatively, they may find themselves being the canary in the coal mine as a forewarning to other cryptocurrency investors.”