If the emotional roller coaster of the cryptocurrency crash following Elon Musk’s latest Tweet that Bitcoin and other cryptocurrency mining consumes too much dirty energy such as coal, and his earlier decision that it can no longer be used to buy a Tesla, has got you down, at least one positive spin-off is that the dip may be short lived.
On the upside, the dip in cryptocurrency value may also mean that there could be less tax for some taxpayers to pay over to the South African Revenue Service (SARS) this tax filing season
That’s assuming you are a tax savvy cryptocurrency investor, who is in fact taking the correct steps to stay on the right side of SARS.
The reality is that while cryptocurrency may still be complex and unchartered waters for global tax authorities and some investors, this doesn’t mean there are not already clear rules about cryptocurrency investors’ tax liabilities.
SARS has strengthened capacity to digitally dig into cryptocurrency earnings
Thomas Lobban, Tax Consulting SA’s Legal Manager for Cross Border Taxation warns that SARS is already pulling out its big guns to mine for its own revenue in the profits and income of cryptocurrency investors.
SARS recently announced that it has allocated an additional R3 billion, ‘to modernise its technology infrastructure and systems, expand and improve the use of data analytics and artificial intelligence capabilities, and participate meaningfully in global tax compliance initiatives’.
With this in mind, Lobban, and Tax Consulting SA auditing and taxation specialist Madelene Otto, offer the following advice regarding the top seven (7) factors that all cryptocurrency investors need to urgently speak to their accountants about this tax filing season.
- The first thing you need to speak to your accountant about is the simple fact that all trades (big and small, profit or loss) in cryptocurrency are potentially taxable, not just when it’s withdrawn from your wallet and/or converted to a fiat currency such as Rands or USD.
- Your accountant will also need to know what your intentions are for investing in cryptocurrency. This informs whether your profits are capital in nature, attracting Capital Gains Tax (CGT), or revenue in nature. CGT is levied at 18% maximum and revenue will be taxed at the normal income tax rates up to 45% for individuals.
- Realising cryptocurrency can be done in several ways, including cashing it out for legal tender or using the coins to purchase goods and services with global providers that accept cryptocurrency. Unfortunately, purchasing a Tesla is no longer an option. But should you decide to trade your cryptocurrency to for any goods or services, this is definitely a transaction that your accountant needs to know about because of the tax implications involved.
- It is crucial for cryptocurrency traders to obtain the transaction reports drawn from every relevant exchange or trading platform, and to share these with your accountant. The onus of proof remains on the taxpayer to show that a certain amount is not taxable or deductible when SARS assesses the information provided in the tax return and direct supporting documentation is key.
- How you conduct your cryptocurrency investment activities and whether foreign currency is used would be another factor to consider. When you are dealing with foreign currencies, there are rules in the Income Tax Act that you need to take into account.
- As a cryptocurrency trader deriving a profit for the year, you may be required to submit provisional tax returns twice a year. The volatility of cryptocurrency renders it difficult to provide an accurate estimate for the year and leaves taxpayers and their accountants with a challenge. It is important to ensure that a careful and serious computation is done and estimated tax is duly paid timeously in each case, otherwise onerous penalties may apply.
- Lastly, ensure that your accountant understands cryptocurrency and your specific investment methods applied. Not all transactions are created equal from a tax treatment perspective, so it is important to ensure that the correct tax position is taken, and the correct amount of tax liability is determined and paid in each case.
SARS’ all-seeing eye will mine tax revenue from cryptocurrency traders
In short, there really is nowhere for taxpayers to hide, even when it comes to investing and trading in cryptocurrency as revenue authorities and financial institutions are now sharing information globally to widen their collection nets.
“If you don’t tell your accountant about your cryptocurrency investments and trading activities, you are very likely going to land yourself in hot water and could even end up subject to criminal sanction because this could speak to potential tax evasion. Some investors claim that SARS does not know about their activities, but it is not up to traders to decide whether or not they owe taxes,” Lobban says.
Otto adds that it is vital to use the services of an accountant or tax expert, who is familiar with the intricacies of cryptocurrency trading, and knows how to ensure legal tax compliance.
“Just as cryptocurrency investing and trading is a specialised field that requires knowledge of the various trading platforms and cryptocurrency mechanics to succeed, so is the tax regimen surrounding the revenue and profits generated via online trading, making it crucial to engage a tax professional who understands how to best limit tax liability while making compliant disclosures to SARS,” Otto concludes.
Legal Manager, Cross-Border Taxation