Since their inception in 2009, there have been many misconceptions about crypto assets, often referred to as cryptocurrencies. These misconceptions have cost investors millions of rands and have subsequently been addressed or explained on numerous media platforms.
By now, even novice investors should know that crypto assets are not the preferred mode of buying illicit items on the dark web.
They should also know that transactions are not secret. Although buyer and seller information might be difficult to identify, your crypto transactions are available for all to view in a digital public ledger, should anyone care to go look for it. They are, therefore, more transparent than typical bank transactions. If true anonymity is what you are after, cash will always be king.
Crypto assets are here to stay. However, many questions remain for those who are serious about trading or investing in crypto, particularly when it comes to taxation.
1. Crypto was not previously subject to tax
This is the only misconception that basic reasoning should have eliminated, yet it keeps coming up.
There has never been a point where crypto trading would not have been subject to tax. The South African Revenue Service (Sars) released a statement in 2018 in which it described the nature of taxation on crypto assets. In the statement, Sars stated it would “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”.
Taxation comes into play even if you are trading crypto to crypto, meaning assets for assets. Think of it as buying a car with a house. As silly as it sounds, this would be a great way to avoid paying tax if it only worked that way. The reality is that you have received something of value in exchange for something of value. The value of the items might be debatable, but that doesn’t make it any less an exchange of goods. Even though no money has changed hands, there is a tax implication because it is viewed as a barter transaction.
2. My crypto gains are not taxable until I’ve withdrawn my funds
Another common misconception among crypto investors is that their gains become taxable only after they withdraw funds from the platform.
The communication from Sars addressed this clearly when it stated: “The onus is on taxpayers to declare all cryptocurrency-related taxable income in the tax year in which it is received or accrued. Failure to do so could result in interest and penalties.”
In South Africa, tax is levied on the earlier of receipt or accrual.
A receipt refers to cash in hand, or perhaps even money into your bank account. When you liquidate your crypto assets, you get a receipt in exchange, which means it is yours and you readily have access to it.
An accrual, on the other hand, is an unconditional entitlement to an amount, even though it might not be in your hands or be immediately available to you.
If you are entitled to an amount on your exchange or platform, whether accrued from crypto for crypto transactions, earned as interest, or even as mining rewards, the tax is still leviable in that tax year and should be declared when submitting your returns. Thinking that the gain must first be realised for it to be taxable, or only filing it the following year to even out your exposure to tax, can be seen as tax evasion.
3. Crypto must be taxed as CGT only
The most concerning misconception by far is where traders believe that their crypto asset gains are subject only to capital gains tax (CGT).
The fact that crypto has been classified as assets (no longer referred to as currencies) makes it understandable why traders mistakenly think the gains are subject to CGT. However, not all assets are the same. Trading stock in a shop, for instance, is not taxed as CGT.
In its statement, Sars said, “cryptocurrencies are not regarded by Sars as a currency for income tax purposes or CGT. Instead, cryptocurrencies are regarded by Sars as assets of an intangible nature.” Sars does point out that, unless proved otherwise, normal income tax rules apply, meaning that Sars considers crypto as revenue in nature, not capital.
This might seem like a trivial point, but because CGT has a lower effective tax rate than normal income tax, it can quickly become a troublesome issue when crypto values soar. If your R1 million grew to R10m in one tax year, the difference between income tax (a maximum rate of 45%) and CGT (a maximum rate of 18%) can result in a shocking 27% variance.
Many accountants and advisers are doing their clients a disservice by advising them that crypto assets are CGT in nature. This may not immediately be an issue, but Sars will typically address these mistakes within two or three years down the line.
4. The relevant revenue authority will never find me
The view that Sars will never find you is the view of someone who wishes to remain hidden, which is the very definition of tax evasion. Although you might get away with it for a year or two, there are many examples of individuals who have ended up in prison for doing the same thing.
Sars is unravelling the mysteries of crypto at an alarming rate and learning how to track digital footprints. It is reaching out to trading platforms to access to taxpayer transaction records. It has also started sending out audit letters on the back of the tax returns of known crypto investors.
Regardless of the declaration made in your tax return, Sars is entitled to request information and documentation to substantiate any tax position taken.
Sars also has no “statute of limitations”, so it can investigate older tax returns of individuals who are suspected of flouting their tax obligations.
Continuing from this misconception, let’s assume that a negligent accountant has advised a client to lump the past crypto gains of multiple years into one tax year and list them as a CGT disposal. This would limit the individual’s tax exposure at 18%. However, a 27% discrepancy on gains backdated over multiple years, along with Sars’s penalties and charges, could be devastating to the wealthiest crypto traders.
5. There is no guidance on crypto taxation
Sars expressed its stance on the tax treatment of crypto assets in 2018. Since then, Sars has released numerous guidance notes and statements on the same topic. Media has been abuzz with warnings about Sars’s intent about clamping down on crypto taxation. There has been too much chatter to be ignorant about the inescapable reality of tax on crypto.
Tax can become incredibly complex, particularly when it comes to crypto assets. Not everyone has the appetite or the time to understand it. The only way to overcome this hurdle, if you are a serious investor, is to approach a tax specialist with legal experience, one who understands the technical implications of tax in the crypto space and doesn’t sugar coat the hard facts. Asking for second opinions until you obtain the advice you want will not negate Sars’s clear instruction on your crypto tax obligations.
Thomas Lobban is the head of crypto asset taxation at Tax Consulting SA.
Disclaimer: This article is published purely for informational purposes and does not constitute financial or legal advice.
