Crypto-currency account-holders fume as SARS cracks whip

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Some local crypto-currency account-holders have expressed anger after receiving communication from the South African Revenue Service (SARS) demanding the declaration of their crypto-currency-related investments.

SARS is cracking down on crypto-currency accounts and has confirmed to ITWeb that it continues to apply normal income tax rules to crypto-currencies and expects affected taxpayers to declare their crypto gains or losses as part of their taxable income.

While crypto-currencies such as Bitcoin are not a currency for purposes of South African income tax, they are regarded as an asset for income tax purposes or trading stock – therefore depending on the facts and circumstances of an individual case, capital gains tax or normal tax may apply, says SARS.

For the past few years, the taxman has been exploring various ways to enable it to actively identify crypto account-holders to ensure they declare all crypto-currency-related taxable income.

SARS’s crypto stance follows international standards, with governments across the globe implementing tax policies in one form or another.

In an interview with ITWeb, two crypto investors expressed concerns about the processes and guidelines the taxman will use to determine how much and how they will be taxed.

Tumi Lekota, who does online trading on a full-time basis, says the SARS stance is not feasible.

“As an online trader, I only opened my Bitcoin account at the end of last year and it’s very clear that SARS wants to cash in on those who are raking it in after the recent surge in the price of Bitcoin. I have never heard SARS requesting information on my forex trading investments, therefore I would like to know how crypto-currency is any different, and the approach to be taken,” notes Lekota.

Bitcoin, the world’s most popular digital currency, has seen a significant resurgence, breaching the $1 trillion market capitalisation mark for the first time last month.

South African crypto-currency players believe the surge in the price of Bitcoin is attracting more locals into the market and is, therefore, likely to attract greater regulatory interest.

Another crypto investor, who has an account with Paxful, says the SARS crackdown is bad news for the local crypto industry.

“The majority of South Africans who have crypto-currency accounts are either not working or are self-employed and are merely trying to make a living out of it. Although Bitcoin is on the rise, this is still a high-risk investment. So how will you tax someone who can lose their investments at any moment − if the market goes the opposite direction?” asks the investor, who did not want to be named.

SARS, he adds, should rather focus on taxing major enterprises that make large investments in crypto-currencies, and not the individuals who are trying to make an honest living.

Anyone who has bought any type of crypto-currency, or borrowed or even exchanged crypto-currency for a different one is required by SARS to declare such info.

“Some crypto exchanges specialise in borrowing or ‘loaning’ of different crypto-currencies. So I would prefer SARS to rather track those companies, as they make good returns from those transactions, and not focus on the individuals who get much less,” he adds.

Complex but practical procedure

Marius Reitz, Luno GM for Africa, says the South African-founded crypto-currency exchange has in recent weeks seen more requests for crypto transaction history downloads from local customers.

“Luno has a simple function which allows customers to download their transaction history and invested price per wallet. The tax someone pays will depend on their tax bracket. High net worth individuals/high income earners pay tax at a higher rate. Taxpaying crypto traders should consult with tax advisers to assist with their tax calculations and tax liability,” notes Reitz.

SARS’s position on taxing crypto earnings is nothing new, as the majority of regions, across the globe, have for some years introduced similar tax policies, he adds.

“Many tax agencies have issued guidance on the calculation of crypto gains and losses for individuals and businesses for tax purposes. Several have actually managed to implement innovative policies that harness crypto as a way of making the system better.

“In Belarus, for example, mining and investment in crypto-currencies are deemed personal investments, and so are exempt from income tax and capital gains. The UK, on the other hand, has more stringent measures in place and requires you to pay capital gains tax on every disposal of crypto-currency,” continues Reitz.

Discussing whether the tax crackdown could deter potential local investors from pumping their funds into crypto-currency, Reitz points out this is highly unlikely. “At Luno, we have experienced a significant uptick in new customers globally − we recently added one million new customers in a seven-week period and there was a 45% increase in the number of active clients in SA over December 2020 and January2021.”

Discussing basic tax principles and how these will apply to crypto-currencies locally, Elani van der Westhuizen, senior tax technical at Tax Tim, points out the tax calculation for crypto-currencies is a complex but practical procedure.

“Due to no dedicated laws or regulations specifically for crypto-currency, calculations are based on the principles of South African tax law and the assumption thereof.

“In my opinion, it will be most beneficial for SARS, if crypto income of an individual is taxed as normal income compared to capital gains, since individuals have a capital gains exemption and only a portion of the balance is taxable and added to the individual’s taxable income.”

Van der Westhuizen points out that SARS’s best starting point in implementing this type of tax is to assess if the income is classified as normal income or not.

Zac McClure, co-founder of crypto tax software platform TokenTax, points out that income “received or accrued” from crypto-currency falls under the definition of “gross income”, according to SA’s tax Act.

However, under certain circumstances, gains may be considered capital under the Eighth Schedule to the tax Act.

“In both cases, the tax rules for crypto-currency allow for deducting costs. For example, in the case of income, taxpayers may claim expenses on their taxes. In the case of capital gains taxes, the cost of purchasing the crypto is considered for determining the taxable amount. Thus, you only pay capital gains on any appreciation your crypto has made.”

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