South Africans who are investing in cryptocurrencies like Bitcoin should be aware of the tax implications as the South African Revenue Service (SARS) has cryptocurrency trading firmly in its sights.
This is the warning from Thomas Lobban, legal manager for cross-border taxation at Tax Consulting South Africa.
SARS has recently started to audit cryptocurrency traders in South Africa and asked them for a letter from their trading platform confirming their investments.
The revenue service will also establish a dedicated unit for wealthy individuals to uncover undisclosed offshore assets, including Bitcoin and other cryptocurrencies.
Lobban said these initiatives give a good idea of what local cryptocurrency traders can expect from SARS in future.
The issue of cryptocurrencies and taxations have become a prominent topic because of the Bitcoin boom over the last year.
Many South Africans are investing in cryptocurrencies following the rapid rise in the price of Bitcoin – from under R100,000 in March 2020 to around R1 million a year later.
The increase in cryptocurrency trading means that profits from this trading is firmly in SARS’s sights, said Lobban.
“Bitcoin and other cryptocurrencies have notched up huge gains in past year and more. Bitcoin gained approximately 224% in 2020, for example,” he said.
Given these returns, it’s unsurprising that South Africans are looking at crypto as an investment opportunity, but few realise the tax implications of such a move.
As with any other asset class, investors must understand their tax obligations in relation to their crypto investments, and plan accordingly.
“If they do not, the chances are they could find themselves facing an unwelcome tax bill down the line,’ said Lobban.
Many taxpayers do not know that trading in cryptocurrency renders them liable for tax, or how and when tax is levied on their cryptocurrency gains made.
“Depending on how and why the trades are conducted, some crypto transactions could be deemed to be capital in nature and thus liable only for capital gains tax,” Lobban said.
“Other transactions, in turn, could be deemed to be revenue-earning in nature, and would thus be taxed according to the taxpayer’s normal tax rate as per the tax tables.”
A major misconception is that a “tax event” only occurs when the cryptocurrency is withdrawn and converted into legal tender, but that’s not true.
“If a trade is made between, say, Bitcoin and Ethereum, the notional profits of that transaction would also be taxable,” Lobban said.
While there is as currently no legislation forcing cryptocurrency platforms to report on their clients outside of the general provisions of the relevant tax Acts, the walls are closing in fast.
SARS has already begun asking for information on crypto transactions on audit letters issued to taxpayers.
This means that non-compliant taxpayers will either have to lie – and risk incurring further penalties and back tax later – or reveal their trading history.
“Not providing accurate answers constitutes a criminal offence,” Lobban warned.
SARS is investing heavily in its IT capabilities which will enable it to analyse financial and transaction data more effectively, and identify transactions in and out of crypto platforms.
Using foreign bank accounts is not a solution either because South Africa is party to numerous agreements which enable automatic reporting between jurisdictions.
“We all create digital tracks in our online activity, and there is really no place to hide,” said Lobban.