As the South African Revenue Service (SARS) intensifies its enforcement in the crypto space, individuals who have under-reported or misunderstood their tax obligations may face the risk of having undeclared profits or income from crypto assets – even those from prior years – assessed and taxed.
This is because the normal income tax rules have always applied to them, explains Louis Botha, a tax and exchange control specialist at WTS Renmere.
“Only if prescription applies can the amount not be taxed,” he adds.
Prescription applies where more than three years have passed since a tax assessment was issued. This is subject to certain exceptions, such as fraud, misrepresentation, and material non-disclosure.
“Practically, it will boil down to the following in most instances: for periods going back more than three years, if a person disclosed the fact that they realised crypto-related income in a particular year (more than three years ago), which turns out to be underdeclared, a person will not be liable for additional tax unless there was fraud, misrepresentation or a material non-disclosure on that person’s part,” Botha says.
SARS issued a media statement on the tax treatment of cryptocurrencies in April 2018, stating it “will continue to apply normal income tax rules to cryptocurrencies and will expect affected taxpayers to declare cryptocurrency gains or losses as part of their taxable income”.
Botha says it appeared the statement was issued in response to the uncertainty regarding the tax treatment of mining and trading in cryptocurrencies such as Bitcoin, given that cryptocurrencies (and trading in them) was still quite novel, “at least in a South African context”.
“This uncertainty was understandable, as the whole concept of digital assets was only slowly coming into the mainstream,” he says.
Already back then, SARS noted that the onus was on taxpayers to declare all cryptocurrency-related taxable income in the tax year in which it is received or accrued and that failure to do so could result in interest and penalties.
Earlier this month, SARS urged taxpayers to declare their crypto asset holdings and trades, as the agency steps up enforcement in this area. Citing “phenomenal growth” in digital currencies, SARS noted that more than 5.8 million South Africans now hold crypto assets, but it was concerned that many people are not declaring them on tax returns.
Read: Nowhere to hide as Sars ramps up its use of smart tools
SARS previously invited crypto exchanges and individuals trading or holding crypto assets to disclose their activities voluntarily. Now, as a follow-up, it announced plans to include crypto assets in its compliance programmes.
In a statement released on 8 October, SARS stated that although it is “working assiduously” to make it easy and simple for taxpayers and traders to seamlessly comply with their tax obligations, it is a “strategic objective” to make it hard and expensive for those who are wilfully non-compliant.
Penalties for non-compliance
There are mainly two types of penalties that can be imposed on those who are found to be non-compliant.
Botha explains so-called understatement penalties of between 10% and 200% can be imposed, depending on how SARS classifies the person’s conduct. Penalties of 200% can be charged in cases where SARS believes the facts show there was repeated intentional tax evasion by a taxpayer.
He adds that if the under-declaration of crypto-related income results in the under-declaration or underpayment of provisional tax, penalties of up to 20% can be levied on the under-declared and underpaid provisional tax amounts. Interest can also be charged.
Botha believes SARS is likely to pursue enforcement action, based on its previous statements.
“It will likely focus more on instances where it is easier to identify the mistake on the part of the taxpayer – that is, cases they identify as low-hanging fruit,” he says.
He adds it is expected that SARS will continue to use strategies that have proved effective in the past.
Earlier this year, SARS Commissioner Edward Kieswetter told Daily Maverick that the agency was using artificial intelligence (AI) to improve debt enforcement. By leveraging AI to identify cases where tax debt collection is simpler, SARS can prioritise those over more difficult cases. One method, called debt propensity modelling, involves machine learning algorithms scanning data to pinpoint instances with the highest likelihood of debt recovery, allowing SARS to focus resources on those entities.
SARS set to intensify scrutiny of declared information
Due to the ease of cross-border trading of crypto assets, tax authorities in the past lacked the necessary information to monitor crypto revenues effectively, limiting their ability to ensure taxes are paid on these transactions. However, SARS is addressing this through multilateral agreements, including an upcoming agreement on offshore crypto accounts to be signed by finance ministers next month.
Last year, South Africa, along with 46 countries and two British Overseas Territories, committed to implementing the Crypto-Asset Reporting Framework (CARF), which aims to facilitate the automatic exchange of information between tax authorities by 2027.
Read: South Africa undertakes to implement Crypto-asset Reporting Framework
Additionally, SARS is collaborating with the FSCA to gather information on registered crypto asset service providers (CASPs).
The FSCA’s licensing process for CASPs began on 1 June 2023, with existing institutions required to submit their applications by 30 November 2023. As of 30 June, 383 applications had been received, 138 were approved, five declined, and 80 voluntarily withdrawn. The review process is ongoing.
SARS also receives information directly from local exchanges.
According to Botha, understanding the implications of SARS’s latest drive to include crypto assets in its compliance programmes requires looking at what it has said and done in the past. He says SARS included specific questions regarding ownership and disposal of crypto assets in the questionnaire section of the income tax return (on eFiling) for the first time a number of years ago.
“As such, SARS’s efforts in monitoring and enforcing compliance are not entirely new. SARS’s increased focus on compliance by participants in the crypto assets industry – in respect of service providers, traders, and investors – will not affect the taxation of crypto investments per se.”
Botha adds that on the investor/trading side, a person will still realise income or losses (on revenue account) taxed at normal marginal income tax rates (where trading is part of a profit-making scheme) or capital losses or capital gains, where the assets were held as capital assets, taxed at a maximum effective rate of up to 18%.
He says what may change is SARS’s scrutiny on what was declared.
“For example, an individual who declared that they realised capital gains on crypto assets sold may be asked to explain why the amount should be taxed as a capital gain (taxed at lower rates) as opposed to trading income taxed at the normal marginal income tax rates. Additional reporting obligations are only required by investors and traders if there are changes to the laws regarding declaration or to the income tax return,” he says.
Botha says CASPs registered with the FSCA will likely have to submit third-party data returns to SARS, and SARS could use them to determine whether a person declared their crypto-related income correctly.
“SARS has increasingly focused on using third-party data provided by institutions required to do so (including financial institutions) in recent years to determine instances of non-compliance by taxpayers,” he says.
Take proactive steps
Taxpayers looking to ensure compliance with SARS’s requirements regarding crypto assets should take proactive steps to avoid potential pitfalls.
Botha says the most important thing is good record-keeping. If a person did not do this in the past, he says it would be prudent to update their past records, determine whether there was crypto-related income they should have declared, and if mistakes were made, to declare this under the Voluntary Disclosure Programme (VDP).
The VDP comes with strict conditions. One is that taxpayers must approach SARS first. Once SARS has identified the taxpayer for audit, they are precluded from applying for the VDP.
“A successful VDP application will, in most instances result, in no penalties being payable, although interest is still charged. The maximum penalty that can be imposed pursuant to a successful VDP application is a 10% understatement penalty, which applies where there was intentional tax evasion on the part of the taxpayer,” Botha says.
Disclaimer: The information in this article does not constitute tax, legal, or financial planning advice that is appropriate for every individual’s needs and circumstances.
