SARS is coming after these taxpayers hard, legal experts warn
The South African Revenue Service (SARS) is turning its attention toward crypto traders in South Africa—who are now receiving notices that their tax affairs are under review.
According to legal experts at Webber Wentzel, the taxman is increasing its scrutiny of these traders by impressing on them and clarifying exchange control regulations.
They warned that traders must immediately comply to avoid penalties.
“These notifications are based on information obtained from various crypto asset exchanges, signalling a significant escalation in SARS’ efforts to enforce tax compliance within the burgeoning crypto sector,” the legal firm said.
Following South Africa’s move to regulate financial service providers who provide financial services related to crypto assets, licensed crypto-asset exchanges are now required to provide certain information to regulators.
SARS has cautioned traders that failure to provide requested information could be deemed a criminal offence under the Tax Administration Act.
“This move underscores the tax authority’s ‘leave no stone unturned’ policy in its pursuit of revenue collection by any means necessary and taxable profits from crypto trading are no exception,” it said.
To crack down on non-compliance, SARS appears to be leveraging artificial intelligence (AI) technology.
However, the full extent of AI’s implementation in identifying non-compliant crypto traders remains uncertain, Webber Wentzel said.
The legal experts warned that it is not only SARS that has crypto on its radar, with the South African Reserve Bank (SARB) also making its stance on the matter clear—particularly concerning exchange control regulations.
According to the SARB, neither the Currency and Exchanges Manual for Authorised Dealers, nor the Currency and Exchanges Manual for Authorised Dealers in foreign exchange with limited authority, allow for cross-border or foreign exchange transfers for the explicit purpose of purchasing crypto assets.
From an exchange control perspective, the Financial Surveillance Department is unable to approve any transactions of this nature.
However, SARB does allow individuals to use their single discretionary allowance—an allowance of up to an overall limit of R1 million per calendar year—or foreign capital allowance to acquire crypto assets.
“This provides a legal pathway for South Africans to invest in cryptocurrencies within the boundaries of existing financial regulations. However, the Foreign Direct Investment dispensation does not permit investments in crypto assets,” the legal team said.
The law firm also noted that, while this provides some clarity for natural persons, the position of juristic entities remains challenging.
“The increased scrutiny from SARS, coupled with the regulatory stance of SARB, signals a new era of accountability and transparency for crypto traders in South Africa.
“Those engaged in crypto trading must now navigate a more complex regulatory landscape, ensuring they remain compliant to avoid severe penalties and legal repercussions.”
The experts warned that the “era of flying under the radar” is swiftly coming to an end, and traders must adapt to these regulatory changes to safeguard their financial interests.
How crypto is taxed
According to tax experts at Tax Consulting SA, in South African tax law, 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.
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.”
Under South African domestic law, a crypto asset is not considered a currency but rather has either a capital or revenue nature, depending on the 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.
Tax Consulting noted that a common misconception in the crypto community is that a “taxable event” only occurs upon the disposal of a crypto asset, which results in the realisation of “real world money,” aka a fiat currency profit/gain.
However, any sale, exchange (crypto asset for crypto asset), 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 crypto asset 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.
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.
“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,” Tax Consulting said.
The assumption that SARS cannot go back more than five years should also be avoided, it said.
“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.
SARB authorisation on an Advanced Trading Model would be needed for these trade—and nine times out of ten, this has not been obtained.
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