SARS Targets Cryptocurrency Traders – Essential Information for Compliance

Tax experts have noted that the South African Revenue Service (SARS) is intensifying its scrutiny of cryptocurrency traders to identify potential non-compliance. Tax practitioners at Tax Consulting SA emphasize that individuals involved in crypto-related activities must be vigilant about reporting requirements, even if these activities do not convert directly to fiat currency. Here’s an in-depth look at what you need to know:

Stringent Reporting Requirements

Despite the seeming anonymity and decentralization of cryptocurrency, SARS mandates strict reporting for any benefits derived from crypto activities. This includes declaration and payment of taxes on these benefits. Through collaboration with the South African Reserve Bank (SARB) and international information exchanges, SARS is committed to eradicating non-compliance.

Misconceptions about Crypto Taxation

A common misconception is that profits from cryptocurrency trading fall outside the South African tax net. However, SARS has clarified that this is not the case. Crypto profits or gains are indeed subject to taxation under South African law.

Classification of Crypto Assets

Under South African tax law, crypto assets are classified as financial instruments. This classification means that any profits from dealing in crypto assets may be subject to tax disclosure and liability. The complexity of cryptocurrency transactions means they are governed by a variety of tax regulations, including capital gains tax (CGT), income tax, and, in some cases, VAT.

Constantly Evolving Regulations

The rules around cryptocurrency taxation are continuously evolving, and different jurisdictions may interpret these laws differently. For South African taxpayers, it’s crucial to stay updated on these changes, especially as SARS is actively monitoring the growth in value of crypto assets.

Legal Definition and Tax Implications

The Taxation Laws Amendment Act, 23 of 2020 (“TLAB”), provides a concrete definition of a “crypto asset” as a digital representation of value not issued by a central bank but traded, transferred, and stored electronically. Under South African law, crypto assets are not considered currency but rather have either a capital or revenue nature, depending on the circumstances. This classification means that ordinary income tax rules apply to crypto assets, and traders must declare any losses or gains per tax year.

Taxable Events and Obligations

One common misconception among the crypto community is that a “taxable event” occurs only when crypto assets are converted into fiat currency. However, any sale, exchange (crypto for crypto), or disposal of crypto assets is likely to be considered a taxable event. The key factor determining tax liability is whether the disposed crypto asset is considered a capital asset or trading stock. If classified as a capital asset, taxpayers will be subject to CGT, which is taxed at a lower rate than ordinary income.

Income Tax on Crypto Profits

If SARS classifies profits from crypto dealings as income, these will be taxed at the marginal rates applicable to individuals (up to 45%) or companies (27%). This classification is particularly relevant for frequent traders whose activities might push them into higher tax brackets.

SARS’ Vigilance and Historical Non-Compliance

SARS is intensifying its crackdown on crypto-tax compliance, aiming to ensure all taxable profits are declared. Taxpayers should not assume that non-declaration of crypto profits in the past will be overlooked. SARS has made it clear that it will leave no stone unturned in fulfilling its mandate to collect revenue, and it can investigate historical transactions beyond the standard five-year period if there has been a failure to disclose material facts, fraud, or misrepresentation.

International Trading Platforms

Even compliant crypto investors are not entirely safe if they trade on foreign platforms. The South African Reserve Bank requires authorization for an Advanced Trading Model for such activities, which is often overlooked by traders.

Conclusion

With SARS’ increased focus on cryptocurrency transactions, it is crucial for traders to understand their tax obligations thoroughly. Accurate record-keeping, understanding taxable events, and staying informed about evolving regulations are essential for compliance. Consulting with tax professionals who specialize in cryptocurrency can provide valuable guidance and ensure that you meet all legal requirements. As SARS continues to enhance its monitoring capabilities, proactive compliance will safeguard your financial interests and help avoid potential penalties.