If you are doing anything with cryptocurrency other than buying and holding it, there are tax implications in South Africa, tax consultant André Bothma has warned.
Bothma, who also serves as tax content creator at BankerX, explained that South Africa’s Income Tax Act defines cryptocurrency as a financial instrument. All the normal tax provisions that apply to financial instruments will also apply to cryptocurrencies.
“The reason why lawmakers have defined it as a financial instrument is that it can be used like a normal currency, but its value determined by market supply and demand,” said Bothma.
He said there are two major misconceptions when it comes to cryptocurrencies and taxes in South Africa:
- That buying and selling of digital assets will attract only capital gains tax.
- That a taxable event is only triggered when you “cash out” to fiat currency.
In reality, the way South Africa’s tax laws apply to cryptocurrencies are far more complex.
Bothma explained that your intentions when purchasing cryptocurrency is important for determining how it is taxed.
If your aim was to trade your digital assets on exchange or, more accurately, “a scheme of profit-making”, then your cryptocurrency purchases become “trading stock” and the profits are taxed at normal income tax rates – 18%–45% for individuals, and 28% for companies.
If your intention was to invest for long term gains, then your crypto asset purchases become “capital assets” and gains will be taxed at Capital Gains Tax rates. These are much lower than normal tax rates – 7.2% to 18% for individuals, and 22.4% for companies.
Bothma said that the onus is on the taxpayer to prove that their intention matches their actions.
“One thing is certain, the more crypto transactions you make the more you look like you’re in a scheme of profit-making,” he said.
He also explained that cryptocurrencies do not benefit from the “three-year rule” which deems a share to be a capital asset if it’s held for longer than 3 years.
“A cryptocurrency will either be a capital asset or trading stock as per the intention of the taxpayer.”
Bothma said that South Africa is among many countries which consider most movements of cryptocurrency as taxable events. He highlighted five examples where South Africans need to declare their gains or losses to the South African Revenue Service (SARS):
- Converting from cryptocurrency to fiat — If you sell your digital assets and “cash out” then you pay either normal income tax or capital gains taxes, depending on whether you were trading or investing.
- Exchanging one cryptocurrency for another — When you exchange one digital asset for another, such as buying ether with bitcoin (or vice versa) it’s a taxable event. It is considered a disposal for tax purposes and is treated the same as selling one share to buy another.
- Making payments with cryptocurrencies — lf you use your cryptocurrency to pay for goods, it is treated as selling the cryptocurrency to buy goods and services.
- Receiving your income in cryptocurrency — lf you receive your salary in cryptocurrency, or in exchange for goods or services you sold, you need to include it in your taxable income.
- Mining cryptocurrency — In South Africa, the moment that you mine a crypto token the market value of that coin is added to your gross income. Expenses incurred as a coin miner can be deducted for tax purposes.
Buying and holding a single crypto asset is therefore the most tax-efficient strategy, Bothma said.
MyBroadband asked Bothma to further clarify his second taxable event example.
Would derivates traders and fund managers receive the same treatment from the taxman if they used one stock to buy another, or use unrealised gains to open another trading position?
According to Bothma, they are all treated the same.
“Let’s say I invest R100,000 with a broker and they invest that in 1,000 shares of a company. If they decide to swap out those shares with a different company’s stock it triggers a capital gains tax event,” he explained.
Similarly, if you use bitcoin to buy ether, it will be treated as if you sold that bitcoin for rand and used that rand value to buy the ether.
“It’s the same as selling one share to buy another,” said Bothma.
The obvious problem with exchanging crypto to crypto – or a product or service – is that this triggers a tax event, but not necessarily an increase in your cash-flow.
“So to pay the tax, you’ll need to pay it from whatever cash you do have. SARS doesn’t care,” he said.
Your tax is determined by calculating the profit or loss you made. This is done by subtracting the current rand value of your bitcoin from the rand value you bought it for.
However, Bothma warned that your losses are ring-fenced.
If you make a loss on cryptocurrency you originally bought as an investment, that will count as a capital loss and it can only be deducted from capital gains. If there is no capital gains to deduct such a loss from then it is carried over to the next tax year.
If you make losses as a trader, the Income Tax Act regards cryptocurrency as a suspect or hobby trade.
“This means that the losses you make on cryptocurrencies will be ring-fenced in terms of Section 20A of the Income Tax Act.”
[Thread] As promised, here's my take on the tax implications and provisions in the Income Tax Act on cryptocurrencies. Credit to @SlwaneToYou for proofreading.
— André Bothma (@AndreBothmaTax) May 10, 2021
Bothma said another frustration for cryptocurrency investors and traders is that conventional brokers handle all the tax calculations for you and provide you with an IT3c document that contains all the information you need for your tax return.
This service is not available to people who invest in cryptocurrencies. People have to do that for themselves, and that’s a lot of work.
While it’s up to taxpayers to declare their cryptocurrency-related activities, Bothma warned that it is not worth lying to the revenue services about your holdings.
“SARS has already begun to ask taxpayers about their crypto activities for its verification process — either you lie, and face potential non-disclosure penalties, or you open your books,” he said.
Penalties can range from between 10% and 200% of the tax liability, depending on the severity of the case.