SARS is coming after crypto traders – what you need to know

Tax experts say that the South African Revenue Service (SARS) is targeting cryptocurrency traders to sniff out potential non-compliance.

Tax practitioners at Tax Consulting SA said that taxpayers must be aware that crypto-related activities, even though on-platform and perhaps not realised for fiat gain, carry stringent reporting requirements, including declaration and payment of taxes due on the benefits derived thereon.

“SARS and the South African Reserve Bank (SARB), through existing working groups and international information exchanges, have reiterated their already strong stance on eradicating non-compliance.

“This includes a keen focus on crypto asset taxation and rectifying historic taxpayer issues of non-declaration of crypto-related profits or gains, albeit without providing firm guidance to the average taxpayer,” they said.

The revenue collector and exchange control gatekeeper have addressed the historically common misconception among taxpayers that crypto profits or gains fall outside the South African tax net on numerous occasions.

Classification of Crypto Assets

In South African tax law, the experts explained that crypto assets are considered financial instruments under the Income Tax Act.

“This means that any profits resulting from dealing in crypto assets may fall within the tax net and be subject to disclosure and possible liability towards SARS.

“As simple as this disclosure may sound in theory, unfortunately, the reality is more complicated. Cryptocurrency transactions are subject to a range of tax regulations, including capital gains tax, income tax, and even VAT in some cases,” they said.

Moreover, the rules around cryptocurrency taxation are constantly evolving, with different jurisdictions interpreting the law differently.

If your crypto assets have been growing in value, it is important to heed the warning that SARS is actively monitoring these developments.

SARS’ Stance

The Taxation Laws Amendment Act, 23 of 2020 (“TLAB”) concretised the classification of a “crypto asset”, which, according to SARS, can be described as:

“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.”

“As we now know, under South African domestic law, a crypto asset is not considered a currency but rather has either a capital or revenue nature, depending on circumstance.

“This means that ordinary income tax rules will apply to crypto assets, and traders must declare any losses or gains per tax year.

“This will fall either under “gross income” or “capital gain”, circumstance dependent,” they said.

Your Obligations

A common misconception amongst the crypto community is that a “taxable event” only occurs upon the disposal of a CA, which results in the realisation of “real world money,” aka a fiat currency profit/gain.

Any sale, exchange (CA for CA), or disposal of crypto assets is likely to be considered a taxable event.

The key differentiating factor, which could result in a massive tax liability differential, is whether the CA so-disposed can be considered a capital asset or trading stock.

If the correct capital intent and objective external factors are shown, taxpayers will only be subjected to Capital Gains Tax.

“Like selling a house, CGT liability arises if the profits received from the sale of crypto assets exceed the initial cost and are at a lower rate of taxation than if the proceeds of the sale were deemed to be normal income,” the experts said.

If SARS views the profits from crypto dealings as income, they will be taxed at marginal rates applicable to individuals (up to 45%) or companies (27%).

This is particularly relevant for frequent traders whose crypto activities might push them into higher tax brackets.

Following good crypto returns, it may be tempting to “cash in” on profits to splurge on something new and shiny. But bear in mind that SARS is strengthening its crackdown on crypto-tax compliance and demanding its share.

Those who hold, or have ever held, crypto should certainly not assume that historical non-declaration means that SARS will not look to tax these profits in future. SARS has clarified that no stone will be left unturned in fulfilling its mandate to collect revenue by whatever means necessary.

The assumption that SARS cannot go back more than five years should also be avoided.

SARS is well within its rights to look into all historical transactions where a taxpayer has failed to disclose material facts to SARS, committed fraud, or made misrepresentations.

The tax experts added that, even if a crypto investor or trader is in SARS’ good books, they are still not out of the woods yet, especially where foreign trading platforms are involved, as the South African Reserve Bank authorisation on an Advanced Trading Model would be needed, and nine out of ten times, has not been obtained.

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