Investing in Bitcoin and other cryptocurrencies is a risky game, but the rewards can be extremely high.
Many South Africans have benefitted from the volatile value of cryptocurrency by making purchases, in many cases doubling or tripling their initial investment.
Your work is not done when you sell your crypto for cash on an exchange, however, as you are required to calculate your earnings or losses for tax purposes.
SARS recently announced that normal income tax rules apply to cryptocurrencies, meaning taxpayers must declare profits or losses as part of their taxable income.
It added that the responsibility to declare cryptocurrency-related taxable income is on the taxpayer, and that failure to declare the income could result in interest and penalties.
This process is made difficult by the volatile nature of cryptocurrency and the lack of regulation surrounding the technology, so we asked Ettiene Retief, Chairman of the National Tax and SARS Committee at SAIPA, for feedback on the matter.
Calculating your crypto tax
Retief said that both profits and losses from cryptocurrency would be subject to tax, but either capital gains tax or income tax could apply.
“The facts in regards to the nature of the transactions will determine whether capital gains tax or normal income tax will apply,” said Retief.
“Typically, a person who trades regularly with cryptocurrencies may be subject to normal income tax.”
“In some cases, there may be limitations or even ring-fencing that may apply in regards to losses.”
The situation described above applies to day traders and short-term investors, and Retief added that capital gains tax could apply in the case of long-term investments.
“Where a person purchases and holds a cryptocurrency for a long period aimed at investing or capital growth, the profits or losses may be subject to capital gains tax instead of normal income tax,” said Retief.
In both of these cases, it is possible to declare losses to SARS and receive tax benefits.
Retief said if a capital loss is incurred from a cryptocurrency investment, this can be used against future capital gains.
However, losses claimed on short-term investments or cryptocurrency earnings could be limited, depending on specific factors relating to the taxpayer.
“Where normal income tax applies, the loss could be claimed in that year of assessment, but may be limited or ring-fenced,” he said.