The South African Revenue Service (SARS) may soon look for criminal convictions against people who have not paid tax on their cryptocurrency profits.
This was the warning from Thomas Lobban, the legal manager for cross-border taxation at Tax Consulting South Africa.
Lobban said it became easier this year for South African authorities to secure criminal convictions for tax offences.
“What must be proved in this regard is not only whether a taxpayer willfully committed an alleged offence but, alternatively, that the taxpayer had acted negligently — in other words, that a reasonable person would have acted otherwise,” stated Lobban.
“While we are not aware of any convictions secured yet, one may presume that SARS will soon be looking to make examples.”
Lobban said it is crucial that taxpayers make sure to meet their obligations and remain compliant, as SARS has started cracking down on undeclared taxes due on cryptocurrency transactions.
At the start of the year, SARS sent audit requests to taxpayers requesting that they disclose cryptocurrency trades and purchases.
In early June, SARS reportedly reached out to independent South African cryptocurrency platforms and asked them to provide information about their clients, Lobban said.
This followed statements from SARS Commissioner Edward Kieswetter, who said that the tax collector would not tolerate non-compliance in this regard.
“There seems to be good reason for this approach,” said Lobban.
“Individual South African taxpayers have largely been overburdened from a tax perspective, and this, among other issues such as pervasive corruption in government, have resulted in a sharp reduction in the willingness of South Africans to comply with their tax obligations.”
Combined with the mistaken belief that crypto-asset transactions cannot be traced, Lobban said that many taxpayers are still under the impression that SARS will not pick up on crypto tax evasion.
According to Lobban, SARS has embarked on a project to reinvent itself and improve its information-gathering mechanisms.
He explained that the tax collector is not restricted to South Africa’s borders and can request information about a taxpayer from other revenue authorities around the world.
SARS can also ask for help in collecting taxes from other governments in terms of the many tax treaties it has in place.
“This means that taxpayers should not only concern themselves with what transactions may be visible to SARS, but also to other revenue authorities in different countries as well,” Lobban said.
While SARS is seemingly beginning to play hardball regarding outstanding tax liability, Lobban said it has failed to give any meaningful guidance to taxpayers.
Cryptocurrency investors have been left with nothing more than their own best guesses about the correct tax treatment to be applied in each scenario.
“Most have very strange beliefs about tax and crypto-assets — such as tax only becoming applicable upon withdrawal or crypto not previously being subject to tax at all,” he said.
Another issue is that the tax on crypto-assets is still not well understood by South African tax practitioners.
“In the overwhelming majority of cases, taxpayers have been advised by a tax practitioner that their crypto profits will be subject to capital gains tax rather than normal [income] tax,” said Lobban.
However, in many cases, cryptocurrency is not subject to capital gains tax — which has a much lower maximum tax rate than income tax.
The intention of the taxpayer, supported by objective factors such as length of holding and frequency of trades, determines how cryptocurrency gains are taxed.
However, it may not be easy for taxpayers to prove that their cryptocurrency investment gains fall within the capital gains net as there are no rules in the Income Tax Act for cryptocurrency.
“To stay in SARS’ good books and avoid sanction, crypto investors should approach SARS first and declare crypto profits and losses in their returns,” stated Lobban.
He said that there are avenues for correction for outstanding historic tax liability without the threat of criminal liability.
“However, the options available to taxpayers become severely limited once SARS notifies them of an impending or potential audit,” Lobban warned.
“It is prudent for crypto investors to obtain competent advice from a tax firm, preferably with a strong legal component.”