“Currently, SARS is sharpening its tools and is making sure that they have sufficient information on the South African cryptocurrency market through which they will later sift,” says Tax Consulting SA Head of Crypto Asset Taxation, Thomas Lobban.
“This action is framing a big project of compliance enforcement around cryptocurrency and other hidden wealth, which we predict is coming soon – very soon.”
HUNTING FOR DATA
SARS has already made significant moves to improve tax compliance related to cryptocurrency, including having already added cryptocurrency investment-related questions in SARS’ tax returns to track trading or capital gains and losses.
In certain cases, SARS has requested that taxpayers provide reasons for their cryptocurrency investments as well as supporting documentation from their crypto asset service provider, or CASP.
Further tightening its oversight of the digital asset space, in June 2021, three of South Africa’s largest CASPs revealed in a joint statement that SARS had requested information of several of their customers involved in “the mining, speculation and/or investment in crypto assets”.
Under the Tax Administration Act, CASPs, much like banks, traditional asset managers and pension funds, or any other person, are obliged to provide this information to the tax authority when requested.
“To date, SARS has demanded, and received, information from at least 12 South African CASPs, while also auditing taxpayers directly in cases where it believes there may have been undeclared gains, so there is already a rich pool of information.
“This means that SARS either knows about your cryptocurrency investments, or knows where to obtain this information, but is waiting for you to declare or remain non-compliant,” Lobban cautions.
While he anticipates the introduction of formal cryptocurrency tax regulation in 2022 as well asthe strengthening of compliance enforcement functions on an operational level at SARS, he does not expect amendments to the existing tax legislation – yet.
“Legislative change is probably still some time down the line. One of the biggest question marks is whether crypto will require special tax treatment, similar to shares and other securities.
“South Africa is revenue-hungry and has a firm tax ceiling, so SARS’ best answer will be to plug the compliance gaps – of which cryptocurrency is one of the lowest-hanging fruit. The trick is not to underestimate SARS; Commissioner Edward Kieswetter is working hard to make it a robust institution, and he is succeeding at this task.”
Lobban’s assertions follow the release of a position paper on crypto assets in June 2021 by the Crypto Assets Regulatory Working Group (CARWG) of the Intergovernmental Fintech Working Group. The CARWG is tasked with investigating all aspects of crypto assets and related blockchain concepts to develop a suitable, cohesive governmental response and regulatory framework.
The paper confirmed that crypto assets will be brought into the South African regulatory purview in “a phased and structured manner.”
Recently, in the 2022 Budget Review, the Minister of Finance announced that CASPs will be treated as accountable institutions under the Financial Intelligence Centre Act to address money laundering concerns.
The Ministry of Finance is further considering the declaration of crypto assets as a financial product, bringing it under the ambit of the Financial Advisory and Intermediary Services Act, which means that any person giving advice or intermediary services in relation to crypto assets will be treated as a financial services provider.
Finally, in bringing much-needed clarity to crypto from an exchange control perspective, it is further planned to include crypto assets within these regulations.
HOW SARS CURRENTLY VIEWS CRYPTO TAX
SARS lays out clearly that all transactions or speculation in crypto assets are “subject to the general principles of South African tax law and taxed accordingly”. Crypto assets are generally viewed as revenue in nature, where the primary intention of its investment and trading is to derive a profit – this means that the normal tax rates apply on profits and crypto earnings.
In South Africa, a crypto asset is considered to be a “digital representation of value that is not issued by a central bank, but is traded, transferred and stored electronically for the purposes of payment, investment and other forms of utility.”
SARS outlines that, while crypto asset holders may argue that their intention is wealth creation rather than revenue accrual, should the transaction history of an individual’s crypto portfolio reflect active trading (multiple transactions), it would most likely be viewed by SARS as revenue in nature.
“Legislatively, SARS is granted a wide range of collection powers in terms of the Income Tax Act, including a requirement for third-party service providers to submit financial data. Enforcement and audit processes are confidential and not shared with members of the public,” it states on its website.
HOW CRYPTO IS TAXED
Following conventional income tax rules, income received or accrued from crypto asset transactions can be taxed under gross income, or, alternatively, may be regarded as capital in nature under the Capital Gains Tax dispensation.
Short-term investors or traders will pay tax at their personal income tax rate (up to 45% – based on the tax backet applicable to the taxpayer), while capital gains tax is payable for long-term investors up to a maximum of 18% for individuals.
Lobban explains that all crypto transactions – whether an asset is sold for cash, swopped with another crypto asset, or withdrawn – are taxable. Rewards from a crypto investment – such as those received through staking or mining – are also taxable.
“There is a huge misconception that if investors don’t withdraw their funds, they are not liable for tax. This is untrue. For example, if you swop Bitcoin for Ethereum, a financial transaction has taken place, and you need to pay tax. Some may think this is a loophole which enables them to avoid tax, but tax is still applied on the differential value or earnings from the swop or other transaction,” he says.
Investors who believe their crypto asset investment is not liable to tax under the South African dispensation because it is traded or sold on an international or foreign platform are also misinformed, he adds.
“SARS is able to tax South African tax residents on their worldwide income, and there are Common Reporting Standards to bear in mind, international treaties that allow for the automatic exchange of information between revenue authorities (from which we have already seen audits take place), and tax treaties allowing for the exchange of taxpayer information to SARS from other revenue authorities upon SARS’ request.
“There is always a digital footprint and, at some point, either through a pay out or a deposit from a foreign bank account for example, or even social media posts, SARS can find out about your crypto transactions without even having to ask you.”
POSSIBLE PENALTIES FOR NON-DISCLOSURE
Should a South African taxpayer file a return that does not accurately disclose the extent of their crypto investments – or should they fail to disclose an existing crypto investment at all – they are liable for significant penalties, cautions Lobban.
Detected non-disclosure may be subject to additional tax as well as penalties of up to 150% of the outstanding tax amount, and SARS may have the option to pursue criminal charges carrying a possible penalty of a fine or up to five years in prison.
“It is practice of SARS to ask a taxpayer a question that they may already know the answer to, such as whether or not you have invested in a crypto asset. This provides the taxpayer with an opportunity to openly disclose their investments,” says the tax expert.
Additionally, SARS is increasingly scrutiny in respect of the social media accounts of taxpayers in certain cases, to detect anomalies between their disclosed income and their lifestyle.
“SARS can choose to audit a taxpayer at any point, based on risk, and there is no limitation on how far back SARS can go. You can earn revenue from a crypto transaction in 2017 and 50 years later you are still liable for all outstanding taxes, penalties and interest.
“Should a taxpayer choose not to disclose income from a crypto asset investment, they should be prepared to forever play cat-and-mouse or look over their shoulder,” he says.