South Africa Lacks Clarity Over Crypto Taxation Under Income or Capital Gains

There is lack of clarity concerning how cryptocurrecncies are taxed by the South African Revenue Service (SARS).

At the beginning of the year, SARS commissioner, Edward Kieswetter, confirmed that undisclosed cryptocurrency holdings wlll be a big area of focus for the tax agency in 2021.

In August 2021, the regulatory body published taxation guidance for cryptocurrencies on its website. The guidance affirmed that normal income tax rules apply to crypto assets and affected taxpayers need to declare crypto assets’ gains or losses as part of their taxable income.

The regulator further indicates that taxpayers have a responsibility to declare all crypto assets-related taxable income in the tax year in which it is received or accrued or else they could face interest or penalties.

SARS also indicated that gains in crypto are liable to both income tax and capital tax gains (CTA).

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Here are SARS’ exact statements on how taxation applys to crypto:

“Following normal income tax rules, income received or accrued from crypto assets transactions can be taxed on revenue account under “gross income.

Alternatively such gains may be regarded as capital in nature, as spelt out in the Eighth Schedule to the Act for taxation under the Capital Gains Tax (CGT) paradigm.

Determination of whether an accrual or receipt is revenue or capital in nature is tested under existing jurisprudence (of which there is no shortage).”

– SARS

Webber Wentzel, a tax and legal house in South Africa has said that since crypto is defined as a “financial instrument” in the Income Tax Act, as opposed to ‘currency,’ gains made in crypto qualify as capital gains tax (CGT).

This means the intention of the taxpayer, supported by objective factors such as length of holding and frequency of trades, would determine whether the crypto gains are revenue (taxed at a maximum of 45%) or capital in nature (taxed at a maximum of 18%).

Webber however adds that it may be hard for taxpayers to prove that their crypto investment gains fall within the CGT.

As such, the firm provides the following recommendations that may be useful to crypto users:

In the disposal of Crypto, it is practical to use different wallets for trading cryptos and holding cryptos for long-term gain

Crypto held or acquired on revenue account is taxable as income (45%), otherwise, if held on capital account, subject to CGT (18%)

If a taxpayer derived crypto from mining or forking, then the gains would be subject to income tax (45%) since they are derived from conducting a trade

If the taxpayer’s intention was to hold the crypto as a long-term investment, then they will be subject to CGT (18%) on any gains

Staking rewards are also taxed at income tax rates and are, for now, unlikely to meet the definition of ‘interest.’ This means the annual interest exemption for individuals cannot be set off against staking rewards

When crypto is used as collateral for a loan, there is no disposal of the crypto and no taxing event

With crypto taxation now a reality in South Africa, it is important that users seek advice concerning how to report their taxes so that they do not suffer an unnecessarily hefty tax bill.

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