Crypto assets remain somewhat novel and despite being around for many years some myths continue to persevere – one being that they do not attract tax.
The South African Revenue Service (Sars) has made it clear on numerous occasions that normal income tax rules apply to crypto assets. The onus is on the taxpayer to declare all crypto asset-related taxable income in the year in which it was received.
On its website, Sars sets out the chronology of when the process started to understand and document crypto assets in South Africa. It kicked off in 2014 when National Treasury issued the initial public statement alerting the public to the risks of crypto assets.
In 2016, an Intergovernmental Fintech Working Group was established and comprised of Treasury, the South African Reserve Bank, the Financial Intelligence Centre, and the FSCA. This working group published a position paper in 2020 and updated it in 2021.
In October 2022, the FSCA declared crypto assets to be a financial product in terms of the FAIS Act.
Taxing crypto assets
CH Consulting’s managing director, Chris Herbst, writes that there are several scenarios where a taxpayer can be taxed on crypto asset transactions. These include:
- Realising crypto assets by selling the crypto asset for fiat currency, such as rands or dollars;
- Realising crypto assets by trading the crypto asset for another crypto asset, such as Bitcoin to Etherium (ETH), ETH to Litecoin;
- Receiving crypto assets for mining or staking;
- Receiving crypto assets as remuneration;
- Receiving airdrops (tokens or other digital assets as rewards); or
- Earning a yield on crypto assets.
Tax Consulting SA’s Thomas Lobban presented a detailed breakdown on crypto asset tax and highlighted some of the myths that persist. According to him, some still argue that crypto-to-crypto transactions are not taxable because there is no fiat currency (government-issued currency) involved, that crypto profits are taxable only if you withdraw from the platform, and that Sars will never find the crypto investor.
Sars makes it clear that it is granted a wide range of collection powers in terms of the Income Tax Act, “including a requirement for third-party service providers to submit financial data”.
Capital vs revenue
There has been some debate and perhaps also some myths about the tax treatment of the gains – whether it is revenue or capital in nature.
“This is a question that has been delved into deep in tax literature and the tax courts of South Africa,” remarks Herbst. This has been done for good reason: an individual can be taxed up to 45% on income as opposed to 18% on capital gains.
“Remember that the gain is on the sale of an asset, irrelevant of the fact that this is a crypto asset, thus all the normal tax rules and court cases apply to the gain,” adds Herbst.
He quotes from Sars’s 2020 Capital Gains Guide: “Given their extreme volatility, cryptocurrencies are likely to be held as a speculative asset of a revenue nature.”
Herbst says they have seen that most cases may be taxed as revenue because of the high trading volume of taxpayers and the buy low, sell high, speculative nature of these trades.
Lobban says the gain will be considered revenue when there is an intention to make a profit, either through trading or a profit-making scheme. It will also be considered revenue if the transactions are regular, such as arbitrage or day trading.
It will be considered capital if the capital forms part of one’s income-earning infrastructure, for example, when the asset is acquired to be held “for keeps” or if it was acquired for purposes of earning passive income.
Lobban notes that it should not be incorrectly disclosed. Some of the factors to consider are the intention behind the transactions and the length of holding. There is no halfway house; the dominant intention will decide the matter, he adds.
A flicker of light in this dark tax tunnel is that if the gains are taxed as revenue, the Act allows for the deduction of expenses.
Ring-fencing losses
There have also been instances where taxpayers made a loss on the realisation of their crypto assets in a relevant year of assessment. “A question arises as to whether a taxpayer can deduct this loss against other taxable income,” says Herbst.
This is where the flicker dies. In the case of a local trade, the loss will be ring-fenced and will only be deductible against future crypto asset trading gains if the taxpayer is in the highest bracket (taxed at 45%) and the three-out-of-five-year rule applies. During the last five years of assessment, there must have been an assessed loss in at least three of the five years, or the trade is seen as a suspect trade.
If the trade was from a foreign source (traded on any foreign exchange), the loss will be ring-fenced for all cases, regardless of the taxpayer’s marginal tax rate.
“Again, be careful here, as an exchange like Luno is registered in Singapore. However, it may be perceived as a local exchange,” warns Herbst.
Amanda Visser is a freelance journalist who specialises in tax and has written about trade law, competition law and regulatory issues.
Disclaimer: The views expressed in this article are those of the writer and are not necessarily shared by Moonstone Information Refinery or its sister companies. The information in this article does not constitute financial planning, legal or tax advice that is appropriate to every individual’s needs and circumstances.
