Since its inception in 2009, there have been many misconceptions about crypto assets, often referred to as cryptocurrencies. These confusions have cost eager 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. While 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. It is, therefore, more transparent than typical bank transactions. If true anonymity is what you are after, cash will always be king.
The truth is that crypto assets are here to stay. However, there remain a lot of questions for those who are serious about trading or investing in crypto, especially when it comes to taxation.
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 where they described the nature of taxation on crypto assets. In their statement, SARS stated that they 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. 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.
My crypto gains are not taxable until I’ve withdrawn my funds
Another common misconception amongst crypto investors is that their gains only become taxable after they withdraw funds from the platform. The communication from SARS addresses this clearly when it states that, “… 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.
Crypto must only be taxed as CGT
The most concerning misconception by far is where traders believe that their crypto asset gains are only subject 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 that 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 their statement, SARS says that “… 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.” They do 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 to ponder, but because CGT has a lower effective tax rate than the normal income tax, it can quickly become a troublesome issue when crypto values soar into the heavens. If your R1m grew to R10m in one tax year, then the difference between income tax (up to a maximum rate of 45%) and CGT (up to a maximum rate of 18%) can result in a shocking 27% variance.
There are many accountants and advisors out there who are doing their clients a great 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 made within 2 or 3 years down the line.
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. While 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. They are actively reaching out to trading platforms to gain access to taxpayer transaction records. They have also started sending out audit letters on the back of tax returns of known crypto investors.
Regardless of the declaration made in your tax return, they are entitled to request information and documentation to substantiate any tax position taken. SARS also has no “statute of limitations”, so they 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 then list it 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’ penalties and charges, could be devastating to the wealthiest crypto traders out there.
There is no guidance on crypto taxation
SARS expressed their stance on the tax treatment of crypto assets back in 2018. Since then, they have released numerous guidance notes and statements on the same topic. Media has been abuzz with warnings about SARS’ intent about clamping down on crypto taxation. There has been too much chatter around to be ignorant about the inescapable reality of tax on crypto.
Tax can become incredibly complex, especially 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 get the advice you want, will not negate SARS’ clear instruction on your crypto tax obligations.
Written by Thomas Lobban, Head of Crypto Asset Taxation, Tax Consulting SA