Cryptocurrency – Be Aware of Tax Implications

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With cryptocurrencies becoming more and more accessible for people to invest in, many investors remain unaware of the tax implications. In 2018, the South African Revenue Service already issued a media release to clarify its stance on the tax treatment of crypto-currencies.

Cryptocurrencies – be aware, there are tax considerations that need to be considered when transacting in them.

The South African Revenue Service (​​SARS) is clamping down on the tax collection on cryptocurrency transactions, and some taxpayers may not be aware that these tax implications apply to them.

A cryptocurrency (hereafter “crypto”) is defined as a financial instrument in the Income Tax Act instead of currency. The main reason it is not regarded as currency is that crypto is not widely accepted in South Africa as a payment method (this may change in the future, however).

It is essential to distinguish between events that will trigger income tax rates or Capital Gains Tax rates (hereafter “CGT”). The intention of the taxpayer, supported by objective factors such as length of holding and frequency of trades, plays a vital role to determine whether the crypto gains are revenue or capital in nature.

When revenue in nature, income received or accrued from crypto assets transactions can be taxed on the revenue account under “gross income”. Taxpayers are entitled to claim expenses associated with crypto assets accruals or receipts, provided such expenditure is incurred in the production of the taxpayer’s income and trade purposes.

The consensus is that SARS will likely deem most crypto transactions to be revenue in nature due to its trading nature. For example, high trading volumes make it difficult to argue that the taxpayer intends to hold the crypto as a long-term investment (i.e., capital in nature).

Alternatively, crypto gains may be regarded as capital in nature. This is when crypto-assets are indeed held as long-term investments (the onus is on the taxpayer to prove this to SARS). This argument can be substantiated because crypto has a higher yield potential in recent years because of the possibility of earning interest on a crypto wallet. If capital in nature, CGT rules will apply when disposing of these assets.

When crypto transactions are classified as capital in nature, an important consideration is when a capital loss is incurred. Both the acquisition and disposal of any crypto by a natural person are listed as suspect trade. If, together with the suspect trade, the specific taxpayer is taxed in the highest tax bracket, any assessed losses are automatically ring-fenced. This means that any losses incurred on crypto will not be allowed to reduce their taxable income with this loss and that it will be carried forward to be deducted from future crypto gains.

Taxpayers are reminded that any gross income, gains, losses or crypto assets held at year-end should be disclosed on their income tax returns. Any inclusions in gross income or capital gains should also be included in the taxpayer’s provisional tax calculations each year.

In terms of the Value-Added Tax Act, any transaction in crypto is considered a financial service. Financial services include where a taxpayer issues, acquires, collects, buys, sells, or transfers ownership of any cryptocurrency.

Financial services qualify as an exempt supply, and therefore there are no VAT consequences on a transaction in crypto.

Cryptocurrencies – be aware, there are tax considerations that need to be considered when transacting in them.

The South African Revenue Service (​​SARS) is clamping down on the tax collection on cryptocurrency transactions, and some taxpayers may not be aware that these tax implications apply to them.

A cryptocurrency (hereafter “crypto”) is defined as a financial instrument in the Income Tax Act instead of currency. The main reason it is not regarded as currency is that crypto is not widely accepted in South Africa as a payment method (this may change in the future, however).

It is essential to distinguish between events that will trigger income tax rates or Capital Gains Tax rates (hereafter “CGT”). The intention of the taxpayer, supported by objective factors such as length of holding and frequency of trades, plays a vital role to determine whether the crypto gains are revenue or capital in nature.

When revenue in nature, income received or accrued from crypto assets transactions can be taxed on the revenue account under “gross income”. Taxpayers are entitled to claim expenses associated with crypto assets accruals or receipts, provided such expenditure is incurred in the production of the taxpayer’s income and trade purposes.

The consensus is that SARS will likely deem most crypto transactions to be revenue in nature due to its trading nature. For example, high trading volumes make it difficult to argue that the taxpayer intends to hold the crypto as a long-term investment (i.e., capital in nature).

Alternatively, crypto gains may be regarded as capital in nature. This is when crypto-assets are indeed held as long-term investments (the onus is on the taxpayer to prove this to SARS). This argument can be substantiated because crypto has a higher yield potential in recent years because of the possibility of earning interest on a crypto wallet. If capital in nature, CGT rules will apply when disposing of these assets.

When crypto transactions are classified as capital in nature, an important consideration is when a capital loss is incurred. Both the acquisition and disposal of any crypto by a natural person are listed as suspect trade. If, together with the suspect trade, the specific taxpayer is taxed in the highest tax bracket, any assessed losses are automatically ring-fenced. This means that any losses incurred on crypto will not be allowed to reduce their taxable income with this loss and that it will be carried forward to be deducted from future crypto gains.

Taxpayers are reminded that any gross income, gains, losses or crypto assets held at year-end should be disclosed on their income tax returns. Any inclusions in gross income or capital gains should also be included in the taxpayer’s provisional tax calculations each year.

In terms of the Value-Added Tax Act, any transaction in crypto is considered a financial service. Financial services include where a taxpayer issues, acquires, collects, buys, sells, or transfers ownership of any cryptocurrency.

Financial services qualify as an exempt supply, and therefore there are no VAT consequences on a transaction in crypto.

 

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