South African crypto tax chaos

Thomas Lobban, a tax and legal senior associate at Latita Africa, said South Africa now has almost 140 crypto asset providers, yet the tax implications for crypto traders remain unclear.

The Financial Sector Conduct Authority (FSCA) recently approved the licence applications of 63 more crypto asset service providers (CASPs). 

Therefore, they are now authorised to act as financial services providers. This brings the total number of approved CASPs to 138 of the current 383 applications.

“The good news is that this forms an important part of South Africa’s project to escape its grey-listed status with the Financial Action Task Force,” Lobban said. 

“However, when it comes to taxpayers maintaining their compliance with SARS, many crypto traders remain none the wiser about the correct tax treatment of their investments.”

“In some ways, SARS and National Treasury expect crypto-active taxpayers to remain compliant while the rules around crypto are still abstract.”

According to Lobban, authorities are perceived by many to be putting the cart before the horse as they focus on enforcement first and less on clarifying crypto taxation mechanics.

He said Latita Africa fully supports the regulation of the crypto economy, which promises to –

• Stabilise the often-volatile local crypto markets.
• Protect consumers from fraud and predatory practices within those markets.
• Restrict money laundering schemes and the funding of terrorism.
• Prevent tax evasion.
• Recover undeclared income and capital gains.

As CASPs implement know-your-customer processes, usernames that were once anonymous are now being replaced with detailed customer records.

“The warning is that not only will current and future crypto trades be exposed to SARS’ data collection efforts, but also historic untaxed transactions previously protected by that anonymity,” Lobban said.

“While this is certainly nothing new, as SARS has requested taxpayer information from CASPs before, this information will now be much more readily available.”

It remains to be seen whether SARS will apply its formidable AI technologies to crypto trader records en masse or initially focus on high-value targets only.

One of the biggest problems with South African tax law is that it does not recognise the term “cryptocurrency.” Instead, crypto is seen as a digital asset, not unlike property or stock market shares.

Its basic tax treatment depends greatly on how it is acquired and disposed of. It may be revenue from a trade stock sale, income earned from employment, capital gains on disposal, a windfall from a competition, or some other source – and it is taxed accordingly.

“But it’s not easy to determine a crypto asset’s tax status,” Lobban said. “If I buy and sell crypto in the short term, it’s not necessarily income; if I hold it over a long period, its disposal is not necessarily counted as capital.”

In addition, crypto taxation can be a more multilayered tax experience. For example, loans leveraged in crypto or interest earned in crypto still leave key questions open-ended. 

Lobban said many of the tools currently available to taxpayers for calculating their profits and losses in crypto for tax purposes still miss the mark in insidious ways.

“As another example, exchanging rand-bought Bitcoin for an NFT and later converting the NFT back to Bitcoin is not a passive transaction just because rands are not involved,” he explained.

“Both are considered to be assets and, by law, the mere exchange of assets triggers tax implications at that instant.”

Therefore, they must pay tax in rands at the prevailing exchange rate in the tax year the transaction was completed, even if they never cash in the Bitcoin. 

“This goes against the commonly held but mistaken belief that tax is only assessed when the crypto asset is converted back to fiat,” he said.

Lobban said that SARS and the National Treasury should focus more on providing further clarity and removing the ambiguity in the tax laws applicable to crypto assets to create certainty around how different classes and instances of crypto assets will be taxed. 

In addition, they should endeavour to better educate crypto traders on these treatments.

“This is not a rare occurrence. Notably, for traditional stock trading, section 9C of the Income Tax Act generally deems shares held for more than three years as being subject to CGT on their disposal, not income tax,” he said. 

“This type of clear direction is what crypto traders need to remain tax compliant and authorities should be driven to provide this as much as they are in the equally important imperative of enforcing the current laws.”