How you are taxed on cryptocurrencies
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Many young people are dabbling in cryptocurrencies without being aware of their obligations to the South African Revenue Service (Sars). Recent interventions by Sars requesting client data from some leading cryptocurrency exchanges underline the fact that the government is serious about getting its rightful share of any profits you make.
With tax season opening next month for your 2020/21 tax return, you need to be prepared to declare your cryptocurrency transactions to Sars and to pay tax on them where applicable.
In 2018, Sars released the following statement: “Sars will apply normal income tax rules to cryptocurrencies and will expect affected taxpayers to declare cryptocurrency gains or losses as part of their taxable income. The onus is on taxpayers to declare all cryptocurrency-related taxable income in the tax year in which it is received or accrued. Failure to do so could result in interest and penalties.”
In a recent tax presentation to financial advisers hosted by Glacier by Sanlam, Diane Seccombe, national head of taxation at the Mazars Academy, said Sars treats cryptocurrency as an asset, not as a currency. In fact, Sars and the National Treasury now use the term “cryptoassets” rather than cryptocurrencies. However, they are not assets like shares or bonds ‒ a cryptoasset is defined as a financial instrument, in a class of its own.
Seccombe warned that because Sars is working more closely with the SA Reserve Bank, along with other measures it has instituted, it is able more easily to detect the buying, selling and ownership of cryptoassets, including transactions on offshore exchanges. She reminded the advisers that their clients’ obligations to Sars extend to assets held offshore.
There are two ways you can be taxed on cryptoassets: either on a capital gain if you sell them during the tax year or on income derived from trading or mining.
1. Capital gains tax (CGT). If you are taxed on a capital gain, you get off relatively lightly: as an individual you have an annual exclusion of R40 000, after which 40% of any gain must be included in your taxable income, which is taxed according to the income tax tables. The most you will effectively pay on the whole gain, if you are in the top marginal tax bracket of 45%, is 18%. (If you’re a young person starting out in your career, your marginal rate is likely to be much lower, say about 31%. You need to be earning more than R1.6 million a year to fall into the top bracket.) Remember that CGT only applies when you sell an asset; you don't pay anything on an asset you own that rises in value.
For example, if you bought a Bitcoin five years ago, when it was R11 000, and sold it in January this year for R550 000, your capital gain would have been R539 000. You will need to add R199 600 to your taxable annual income (R539 000 - R40 000 exclusion x 40% = R199 600). If your marginal rate is 31%, you will pay Sars R61 876 (31% of R199 600, or 11.5% of the total gain) on your Bitcoin gain.
2. Revenue as a trader. If you are taxed on revenue derived from trading, then your entire profit, less any qualifying expenses you incurred earning that profit, such as your fibre network costs, must be added to your annual taxable income. On a profit of R539 000 after expenses, if you are already in the highest marginal tax bracket, you will pay R242 550 (45%).
Investor or trader?
On the tax return, there is a section under which to declare capital gains on assets you have disposed of during the tax year, and it makes specific reference to cryptoassets. If you are a trader, there is another section for income earned as such.
So what determines whether you are a cryptoasset investor or trader?
The answer is not a simple one, Seccombe said. This is because cryptoassets currently have little use beyond you wanting to sell them for a profit, unlike other investments, which provide an income stream (in the form of dividends, interest or rental income), or assets bought for personal use, such as a residential property.
If you have shares, the route is more straightforward. According to tax legislation, if you hold a share for three years or more, you are considered an investor by Sars and will be taxed on a capital gain.
This rule does not apply to cryptoassets, Seccombe said. The answer lies in convincing Sars of your intention.
Seccombe said that in 2016, in the Capstone case, a Supreme Court of Appeal decision went in favour of a company that made a large profit on the sale of shares. “The court was gentle on the taxpayer by looking at its activities in a broader context. Making a profit on the shares wasn't the company’s overriding intention.”
The moral of the story for taxpayers, she said, is that if you have broadened your investment portfolio, which is likely to include assets such as unit trusts and shares, to include some cryptoassets, as long as you hold them for a while, you can show Sars that your intentions regarding crytpoassets are no different from those for your other investments - that you are simply diversifying into another asset class.
She emphasised that if you are speculating in cryptoassets, buying and selling them relatively frequently, the answer is clear: you must declare your profits as revenue.
“But if you are genuinely diversifying into crypto and have other investments in your portfolio, then use your intention regarding your overall portfolio to convince Sars that it applies to your cryptoassets as well, and that you are acting in the same way regarding your cryptoassets as you are in respect of your other investments. Then you can argue that it is a capital asset in your hands and any gain or loss on disposal is a capital gain or loss,” Seccombe said.
A further note: if you did not time the market correctly and made a loss on, say, your Bitcoin, you still need to declare it, because the loss can be offset against capital gains on other assets or ring-fenced to be offset against capital gains in future years.