As with paying your SABC TV licence, declaring your crypto assets’ gains or losses as part of your taxable income is “the right thing to do”. Come 2027, it will also be the wise thing to do.
Last week, South Africa, along with 46 countries and two UK overseas territories, agreed to “swiftly” implement a new international standard on the automatic exchange of information between tax authorities: the Crypto-asset Reporting Framework (CARF).
In a joint media statement released on 10 November, these signatory jurisdictions announced their collective engagement to implement CARF “in time for exchanges to commence by 2027”.
When it comes to crypto-asset related revenues, the South African Revenue Service (Sars) is clear. Capital gains tax or income tax is payable on trading in crypto assets – whether profits are income or capital in nature depends on the nature of the transaction and intention. For income tax purposes, crypto assets are classified as financial instruments. Individual investors realising capital gains pay an effective tax rate of up to 18%, while traders with income on revenue account pay income tax at the rate of up to 45%.
But because crypto assets are easily “traded across borders”, tax authorities do not currently have the information they need to monitor crypto-asset revenues efficiently. To date, this lack of information has limited their (and by default Sars’s) ability to ensure taxes are paid on crypto transactions.
CARF aims to change this.
Developed by the Organisation for Economic Co-operation and Development (OECD), CARF provides guidance on how to report cryptocurrency transactions, as well as how to comply with anti-money laundering (AML) and counter-terrorist financing (CTF) regulations.
Once implemented, it aims to achieve crypto-asset transparency through the annual automatic exchange of information related to crypto-asset transactions “among participating jurisdictions whose tax residents engage in such activity”.
“The widespread, consistent and timely implementation of CARF will further improve our ability to ensure tax compliance and clamp down on tax evasion, which reduces public revenues and increases the burden on those who pay their taxes,” the statement read.
It added that, for the next four years, the jurisdictions “that played host to active crypto markets”, would work towards transposing the CARF into domestic law “and activating exchange agreements in time for exchanges to commence by 2027, subject to national legislative procedures as applicable”.
Louis Botha, senior associate: tax and exchange control at Cliffe Dekker Hofmeyr, says what it will essentially come down to is information gathered through third-party-reporting to Sars being exchanged with other tax jurisdictions.
“We have third-party reporting already, but within the context of the Common Reporting Standard (CRS),” says Botha.
Developed in 2014 by the OECD, CRS is a global standard for the automatic exchange of financial account information between governments. CRS involves third parties (such as financial institutions, medical schemes, and fund administrators) acting as intermediaries to collect and report relevant financial information about resident and non-resident account holders to local tax authorities. This information is then exchanged internationally to enhance transparency and combat tax evasion on a global scale.
In South Africa, these third parties are required by law to send information or data to Sars via a return. This means that a bank, for example, must provide information to Sars pertaining to the interest paid on savings in taxpayers’ accounts. Sars then uses the third-party data to confirm whether a person has filed or submitted the correct information in his or her tax returns, to ensure that the information or documents are compliant with the provisions of a relevant tax Act and to determine a person’s tax liability.
Botha says that with CARF, the undersigning jurisdictions are seemingly trying to build on the CRS. Once CARF is implemented, he says, crypto asset service providers (CASPs) will most likely end up having to do the same. CASPs include companies that help users control, trade, or store their crypto assets.
“Sars could then use that information to crosscheck whether you have recorded your crypto-trading profits correctly,” Botha explains.
Location, location, location
A “crypto asset” is defined as a digital representation of value that:
- is not issued by a central bank, but is capable of being traded, transferred, or stored electronically by natural and legal persons for the purpose of payment, investment, and other forms of utility;
- applies cryptographic techniques; and
- uses distributed ledger technology.
But how do you “follow the money” if it only exists in digital form?
Botha says determining “location” is often a big issue when it comes to regulating crypto.
“This is something that regulators struggle with. The South African Reserve Bank (Sarb), for example. They look at cross-border flows, but in a crypto context, crypto only exists digitally. So how do you determine whether something is leaving South Africa and going to another country?”
Another difficult question, he says, is where does the crypto reside?
“If something is in your bank account and you want to transfer it to someone else’s bank or you want to make a payment to the US, you do it through the banking system. The regulators can detect that. With crypto, it’s quite different.”
Botha says one way for CARF to work is for CASPs to be registered in a specific country.
“You can try and argue that the person who holds the digital wallet or holds access to the digital wallet, that the place where that person resides, is the location of the crypto.”
The regulatory net widens
South Africa has been home to some of the biggest and most expensive crypto scams in the world, with the likes of Mirror Trading International and Africrypt making global headlines.
During 2019, the Financial Action Task Force (FATF), of which South Africa is a member, conducted a country review of South Africa in the context of the FATF Recommendations and stated in its Mutual Evaluation Report that South Africa had major deficiencies insofar as “there are no requirements for VASPS (Virtual Asset Service Providers) to be licensed or registered and they are not subject to AML/CFT supervision”.
In October 2022, the FSCA declared crypto assets a financial product (General Notice 1350 of 2022).
At the time, law experts at CDH explained that the declaration sought to address the FATF report’s finding and was viewed by the FSCA as a critical interim step towards protecting customers in the crypto asset environment, pending the conclusion of broader developments surrounding crypto assets through, for example, the Conduct of Financial Institutions Bill.
The declaration puts in place a regulatory and licensing regime for persons providing financial services in respect of crypto assets, having the effect that these crypto asset FSPs are now required to be licensed and consequently be subject to regulatory oversight and supervision.
Botha says, hopefully, the introduction and implementation of CARF will support these attempts at regulating the crypto sector in South Africa.
“And that the Mirror Trading International and Africrypt scams are a thing of the past.”