SARS crypto tax crackdown

SARS is strengthening its crackdown on crypto-tax compliance, and investors and traders need to know their obligations.

This is according to tax experts from Tax Consulting SA, Jashwin Baijoo and Micaela Paschini, who said the revenue service reiterated its already strong stance on eradicating non-compliance.

This will include focusing on crypto asset taxation and rectifying historic taxpayer issues of non-declaration of crypto-related profits or gains.

The experts say there is a historically common misconception amongst taxpayers that crypto profits or gains fall outside the South African tax net.

However, the SARB and SARS have addressed this misconception numerous times, saying taxpayers must be aware that crypto-related activities, even though on-platform and perhaps not realised for fiat gain, do carry with them stringent reporting requirements.

This includes declaration and payment of taxes due on the benefits derived thereon.  

The experts said South Africans who find themselves in either the investor or trader categories need to know the following.

South Africa’s classification of crypto assets

In South African tax law, crypto assets are considered financial instruments under the Income Tax Act.

This means any profits from dealing in crypto assets may fall within the tax net and be subject to disclosure and possible liability towards SARS.

“As simple as this disclosure may sound in theory, unfortunately, the reality is more complicated,” the experts warned.

Cryptocurrency transactions are subject to a range of tax regulations, including capital gains tax, income tax, and VAT in some cases. 

“Moreover, the rules around cryptocurrency taxation are constantly evolving, with different jurisdictions interpreting the law in different ways,” they said.

“If your crypto assets have been growing in value, it is important to heed the warning that SARS is actively monitoring these developments.”

Under South African domestic law, a crypto asset is not considered a currency but has either a capital or revenue nature, circumstance dependent.

“This means that normal income tax rules will find application with crypto assets, and traders would need to declare any losses or gains per tax year. This will fall either under ‘gross income’ or ‘capital gain’,” they explained.

Knowing your obligations – capital or revenue

The experts said a common misconception amongst the crypto-community is that a “taxable event” only occurs upon the disposal of a crypto asset, which results in the realisation of “real world money”, also known as a fiat currency profit or gain. 

However, in reality, any sale, exchange, or disposal of crypto assets will likely be considered a taxable event.

The key differentiating factor, which could result in a massive tax liability differential, is if the crypto asset so-disposed can be considered to be a capital asset or trading stock in nature. 

“If the correct capital intent, together with objective external factors, are shown, taxpayers will be subjected to only capital gains tax,” they explained.

Similar to selling a house, capital gains tax liability arises if the profits received from the sale of crypto assets exceed the initial cost and are at a lower rate of taxation than if the proceeds of the sale were deemed to be normal income.

“If SARS views the profits from crypto dealings as income, they will be taxed at marginal rates applicable to individuals (up to 45%) or companies (27%),” they explained. 

“This is particularly relevant for frequent traders whose crypto activities might push them into higher tax brackets.”

They said that following good crypto returns, investors may be tempted to “cash in” on profits to splurge on something new and shiny. 

“But bear in mind that SARS is strengthening its crackdown on crypto-tax compliance and demands its share,” they warned.