The South African Revenue Service (SARS) is tightening tax collection on cryptocurrency transactions, Joon Chong and Lumen Moolman from Webber Wentzel have warned.
According to Chong and Moolman, this makes it important to distinguish between events that will trigger income tax rates or capital gains tax rates.
They said that SARS is increasingly auditing taxpayers’ crypto holdings and trading activities.
SARS has also requested information from certain South African crypto exchanges, including Luno, about users on the platform and their transactions.
“Crypto is defined as a ‘financial instrument’ in the Income Tax Act 58 of 1962 (ITA), as opposed to ‘currency’ which would have excluded crypto gains from the ambit of capital gains tax,” said Chong and Moolman.
This means that the intention of the taxpayer, supported by objective factors such as length of holding and frequency of trades, would determine how cryptocurrency gains are taxed, they explained.
They said that a taxpayer’s intentions and these objective factors could mean the difference between a maximum tax rate of 45% (income tax) and a maximum tax rate of 18% (capital gains).
Chong and Moolman’s views align with those of tax consultant André Bothma, who previously warned about the tax implications on cryptocurrency transactions.
“SARS has not issued an interpretation note on the tax implications of crypto assets,” Chong and Moolman stated.
The two Webber Wentzel attorneys provided the following list of cryptocurrency transactions you should remember when doing your taxes:
- Selling cryptocurrencies
- Exchanging one crypto for another
- Purchasing goods and services using crypto
- Crypto mining
- Receiving crypto due to a blockchain fork
- Receiving and selling crypto staking rewards
- Receiving crypto airdrops
- Using crypto as collateral for loans
“The disposal of crypto as a financial instrument is a taxable event,” they said.
“It may, however, be hard for taxpayers to prove that their crypto investment gains fall within the [capital gains] net, as there are no capital deeming rules in the [Income Tax Act] for crypto, such as the three-year rule for equity shares.”
In determining the intention of the disposal, SARS may be guided by cases involving the disposal of Krugerrands.
In two separate cases — one where a taxpayer held Krugerrands for 12 years and another who held for eight months to nine years — the Tax Court held that the Krugerrands were held on revenue account and subject to income tax rates.
Chong and Moolman advised that it may be practical to use different wallets for trading cryptos and holding cryptos for long-term gains.
The gain when one crypto (say, bitcoin) is exchanged for another (say, ether) is the difference between the market value of the ether and the acquisition cost of the bitcoin.
If the bitcoin was held or acquired on a revenue account, the difference would be taxed as income (45% maximum).
Otherwise, if held on a capital account, the difference will be subject to capital gains tax (18% maximum).
“It can be difficult to determine the market value and acquisition cost of crypto in ZAR,” the lawyers stated.
“We suggest that the spot rate should be used for the transactions. Schedules of rates and transactions should be compiled on the calculated gains or losses on the tax return.”
The same principles would apply where the taxpayer has purchased goods or services with crypto.
“Assessed losses from trading in crypto may be ring-fenced,” they said.
“It might not be possible to offset these losses against any other income of the taxpayer if the taxable income and losses of that taxpayer — adding back assessed losses from the current and prior year — are more than R1,577,300 for the 2021 tax year.”
However, they noted that there are exceptions to this rule in Section 20A (2)(b)(ix) of the Act.
Staking, mining, forks, and airdrops
If you acquired cryptocurrency from mining or a blockchain fork, your intentions determine how it will be taxed.
If you intended to conduct a trade, the gains would be taxed at your income tax rate.
However, if you intended to hold the crypto as a long-term investment, they will be subject to capital gains.
“Staking rewards are also taxed at income tax rates, and are, for now, unlikely to meet the definition of ‘interest’ in the Income Tax Act,” Chong and Moolman stated.
“This means that the annual interest exemption for individuals cannot be set off against staking rewards.”
Further complexities arise when staking rewards are sold.
For example, assume a taxpayer received staking rewards with a market value of R100 at the time of receipt. That R100 would be subject to income tax as it is akin to interest, without the annual interest exemption.
Assume next that the staking reward is sold for R450 after five years. The difference between R450 and R100 is the gain on the disposal.
This gain may be taxed at capital gains rates, not income tax rates, again depending on the taxpayer’s intention at disposal.
If you receive new crypto through airdrops on existing holdings, this is akin to distributing new financial instruments based on existing financial instruments held.
Once again, SARS would take the taxpayer’s intention in holding the existing crypto, frequency of trading, and how long they held the crypto into account.
“It is irrelevant that the value of the crypto airdropped was not converted to ZAR,” stated Chong and Moolman.
“Income is subject to tax when received or accrued, and there is accrual when there is an unconditional entitlement to the crypto/income.”
Crypto used as collateral
“In our view, when crypto is used as collateral for a loan, there is no disposal of the crypto and no taxing event,” said Chong and Moolman.
“Where the taxpayer is the lender and receives interest in crypto, then the market value of the crypto would be subject to income tax.”
In this situation, Chong and Moolman said that they would argue the annual interest exemption should apply.
“We recommend that taxpayers seek advice to ensure that their crypto gains are reported correctly in their tax returns,” they said.
“The volatility and high-risk nature of this asset class should not be compounded by an unexpected tax bill!”