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SARS has recently announced that they will have a specific focus on undisclosed holdings in Crypto in the upcoming tax season. Treasury and the South African Reserve Bank have increasingly put measures into place, and is still in the process of doing so, to be able to monitor Crypto activity. SARS can track Crypto activity, among other measures, through bank transfers and other digital footprints that investors and traders of Crypto leave.
International tax reporting among tax authorities from different countries is something that has been in place for a long time. This will continue to evolve and reporting on Investors that hold significant amounts of Crypto will be more prevelant. It is however true that tax regulation has moved very slowly in comparison to the evolution of Blockchain technology. This has created tax uncertainty around the treatment of certain events when it comes to Cryptocurrency.
SARS view on Crypto
SARS view Crypto as an asset of intangible nature and therefore not as a currency. This is important as it determines the tax consequences for holding these digital assets. SARS has already started to issue audit letters to taxpayers requesting information on their Crypto investments. When you complete your Income Tax Return, you are required to disclose whether you have held an investment in Crypto. You also need to disclose whether you are a miner or if you have been paid Crypto. Non-compliance and tax evasion can have severe consequences for a taxpayer. It is, therefore, important to ensure that you have disclosed the necessary information and pay the outstanding taxes.
Treasury estimates that there are close to 2 million retail investors in Cryptocurrency in South Africa with a daily flow of around R2 billion in transaction volumes. Many of these investors invest through platforms such as Luno, Ovex, and VALR and with bundle investing in Revix.
Consequences for non-compliance
If you have not declared your tax return, or decide not to, an administrative penalty may be imposed. An administrative penalty is a fixed amount penalty. It is based on the failure to submit a return. The amount can range from anything between R250 to R16 000 per month for as long as the non-compliance continues.
If you understate your tax return, SARS will assess your understatement against six criteria to impose a penalty. These six criteria are (1) reasonable care not taken in completing a return; (2) no reasonable grounds for the tax position taken; (3) an impermissible avoidance arrangement; (4) gross negligence; (5) intentional tax evasion; (6) substantial understatement. The penalties can range from anything from 5% to 200% on the tax differential.
So what will happen if you have not disclosed your Crypto Income or profits in previous tax years?
A Voluntary Disclosure Programme is available to taxpayers in respect of all taxes administered by SARS. It aims to encourage taxpayers to come forward on a voluntary basis. You will be able to regularise your tax affairs with SARS. You will also be able to avoid the imposition of administrative penalties and understatement penalties. A taxpayer may apply to the VDP for voluntary disclosure relief. The following relief is available:
- Sars will not pursue criminal prosecution for a tax offence arising from the ‘default’
- Relief in respect of understatement penalties (certain limitations may apply);
- 100% relief in respect of an administrative non-compliance penalty, but excluding penalty for the late submission of a return.
What about provisional tax?
Provisional tax is not separate from your normal income tax. Provisional tax is purely paying your income tax in advance. If you receive an income other than a salary, allowance, or advance you should register as a provisional taxpayer. You have to register as a provisional taxpayer if you are receiving an income by way of Crypto. You will most likely have to register for provisional tax if your intention is to trade Crypto. If you receive Crypto for mining or rendering of services you also need to register for provisional tax. If you are a Crypto-investor, you will not be required by SARS to register for provisional tax.
You may be exempt from paying provisional tax if both the following two conditions are met:
- Income from your additional activities does not exceed R30 000 per tax years
- Your taxable income does not exceed the tax threshold for the year, currently R83 100
How is your Crypto taxed?
If you are a South African citizen all residency-based rules for tax purposes will apply. That means you will be taxed on your worldwide income. The major consideration is the manner in which you will be taxed. That means you have to differentiate whether you are earning an income from Crypto or holding it as an investment. If you are earning an income from Crypto you will be taxed in accordance with the normal income tax rates. If you are holding Crypto as an investment to realize potential appreciation in value, then you will be subject to Capital Gains Tax (CGT).
Normal income tax consequences of Crypto would mean that you will be subject to a maximum of 45% tax rate according to the tax sliding scales for individuals. The consequence of CGT is that you can be subject to anything from 7.2% – 18% in taxes for capital gains. Any capital losses can be utilized against other capital gains. If you are not able to utilize the loss in the current tax year you are allowed to carry this forward.
Certain expenses can be deducted from trading income or the rendering of services. Mostly these expenses need to have been incurred in the production of the income. If you are a minder this will typically be internet costs, electricity, hardware etc. If you are an investment holder you are allowed to deduct the base cost of the Crypto from the proceeds. The base cost is essentially the cost you incurred in the acquisition of the investment.
The uncertainties of Crypto-tax
There are still some uncertainties around Cryptocurrency. There are events that taxpayers need to take caution with, as this can potentially be a tax trigger. When switching Crypto you are replacing one value for another Crypto value. SARS may see this as a disposal event. This may have a bearing on your tax liability, especially if you are an investor with a long-term view. The switching event or trigger may lead the gain to be included in your income. Therefore it will not be regarded as a capital gain, especially if switching is done quite regularly.
Certain trigger events
Miners are rewarded for verifying transactions on the blockchain network. This reward is regarded as income for tax purposes. Income is taxed at the earliest of accrual or receipt of the value and is subject to normal income tax. The miner will be taxed according to the normal tax tables. The subsequent treatment of the Crypto is then determined on the basis of the intention of the miner. This is either as holding it as an investment or trading with Crypto.
Staking also creates some uncertainty. Staking is where Crypto is lent to the network in return for interest. On interest earned, there is usually an exempted amount of R23 800 that can be applied for individuals. There is still no clarity from SARS on whether this can also be applied to Crypto.
On emigration of a South African citizen, there is usually a disposal event that occurs. This event is on the date that the taxpayers officially emigrates from South Africa. That means if you hold any Crypto on the date of emigration there will be potential tax consequences. The amount of Crypto that you hold will be deemed to be disposed of when you emigrate.
If you need tax advice please get in touch with us here.