South Africans kissing SARS tax goodbye using bitcoin — but a crackdown looming

Many South Africans and foreign business owners use bitcoin to bypass South African taxes and exchange controls. However, a crackdown is looming.

Cryptocurrencies were created to allow anonymous, frictionless, and trusted peer-to-peer transactions over the Internet.

The decentralised financial system makes it possible to use cryptocurrencies like Bitcoin to avoid or evade taxes.

For example, investors can store their cryptocurrencies in paper or hardware wallets instead of relying on an exchange to safeguard their assets.

This makes it impossible for authorities to confiscate these cryptocurrencies and makes it extremely difficult to track their movements.

Cryptocurrencies like Bitcoin have been a headache for the South African Revenue Service (SARS) for a long time.

The process of understanding and documenting crypto assets in South Africa started in 2014 through a joint initiative between SARS and the National Treasury.

In 2018, SARS said it would “apply normal income tax rules to cryptocurrencies and expect affected taxpayers to declare cryptocurrency gains or losses as part of their taxable income”.

“The onus is on taxpayers to declare all cryptocurrency-related taxable income in the tax year in which it is received or accrued. Failure to do so could result in interest and penalties,” it said.

SARS recently reiterated that normal income tax rules apply to crypto assets and that affected taxpayers must declare their gains or losses as part of their taxable income.

SARS made big strides in collecting tax on cryptocurrencies in 2021 by tightening collection on crypto transactions.

The disposal of crypto as a financial instrument is a taxable event, and SARS request information from South African crypto exchanges to keep track of transactions.

Last year, South Africa adopted a Common Reporting Standard to help crack down on individuals who use crypto assets to dodge tax and launder money.

SARS said the Crypto-Asset Reporting Framework (CARF) standard ensured that gains in global tax transparency would not be gradually eroded.

The CARF was signed in March 2023, and 48 countries adopted the standard. It set a 2027 deadline to implement it in its laws.

The time until the deadline will be used to ensure South African crypto exchanges meet the reporting requirements.

Using crypto mining to fly under the radar

One of SARS’s biggest challenges is tracking bitcoin created through cryptocurrency mining.

Bitcoin mining is the computationally-intensive process by which transactions are officially added to the blockchain. Miners are rewarded through bitcoin.

These newly mined bitcoins can be sold or exchanged for cash. As it never touched the traditional financial system or crypto exchanges, it is nearly impossible to track.

Similar to cash, SARS has no insight into the flow of bitcoins unless it enters or exits a system that it tracks.

People and businesses who want to avoid or evade tax are using a combination of cash and bitcoins to fly under the radar.

There are agents who facilitate transactions by people who make most of their money through cash and crypto miners.

The crypto agents have partnerships with large crypto mining operations, which create a large number of bitcoins.

The cash is never declared in their financial statements. Instead of putting this cash in the bank, they use an agent to exchange it for bitcoin from a miner.

These bitcoins are transferred to a personal wallet and do not touch a South African crypto exchange, meaning SARS does not know they exist.

The perpetrators typically convert the bitcoins into cash using an exchange in a foreign country or a Bitcoin ATM.

Even if the money is withdrawn from a foreign crypto exchange with good reporting, the origin of the bitcoin remains unknown. That means SARS does not know it came from South Africa.

The combination of cash and Bitcoin makes the money untraceable. Therefore, SARS cannot track the money or collect taxes on it.

To add insult to injury, many businesses that use bitcoin to evade tax still claim VAT back from SARS while not paying VAT or corporate tax on their income.

Crypto crackdown in South Africa

Lutfiyya Ramiah

Tayyibah Suliman and Lutfiyya Ramiah from Cliffe Dekker Hofmeyr said South Africa’s cryptocurrency landscape may be in for a shift.

This comes as the Financial Intelligence Centre (FIC) released a proposed directive regarding crypto asset transfers.

The directive followed the Financial Sector Conduct Authority’s licencing of 75 crypto asset service providers (CASPs) in South Africa.

The FIC’s directive aims to tighten the reins by forcing CASPs to implement more detailed and stricter requirements for digital transactions.

The scope will apply to any institutions that facilitate domestic or cross-border transfers of crypto assets.

It includes those acting as an intermediary in receiving or transmitting crypto assets for or on behalf of a client.

The directive introduces a “travel rule”, mandating that CASPs and intermediaries exchange specific transaction details to prevent criminals from having unchecked access to digital funds.

“Ordering CASPs will now be required to obtain information regarding originators and transmit it to recipient CASPs about crypto asset transfers,” they said.

The details include full names, identity or passport numbers, residential addresses, dates and places of birth, and wallet addresses.

Similar requirements will apply for cross-border crypto asset transfers, and CASPs will also be required to conduct reasonable due diligence on counterpart CASPs.

This information gathering includes a risk assessment to determine when to allow, reject, or suspend a cryptocurrency transfer due to a lack of information.

Suliman and Ramiah said the FIC’s ambition to enhance the detection of illegal digital crypto transactions is laudable.

However, there are still major concerns about the centralisation of highly sensitive and confidential information.

The concerns include data privacy risks, as end-user data has to be shared with external crypto exchanges.