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Tax implications of cryptocurrency transactions

Tax implications of cryptocurrency transactions

“SARS is tightening tax collection on cryptocurrency transactions, which makes it important to distinguish between events that will trigger income tax rates or CGT rates.”

Thus notes Webber Wentzel’s Joon Chong and Lumen Moolman in an article titled No Doge-ing the tax bill on cryptocurrency transactions. Below is an abbreviated summary.

The South African Revenue Service (SARS) is increasingly auditing taxpayers’ crypto holdings and trading activities. It has also requested information from certain South African crypto exchanges, including Luno, about users on the platform and their transactions.

Have you (i) sold your cryptocurrencies (crypto); (ii) exchanged one crypto for another crypto; (iii) purchased goods and services using crypto; (iv) mined or forked for crypto; (v) received staking rewards in crypto; (vi) then sold your staking rewards; (vii) received air-drops of crypto; or (viii) used crypto as collateral for loans? If you answered yes to any of these questions, remember your taxes!

SARS has not issued an interpretation note on the tax implications of crypto assets. Crypto is defined as a “financial instrument” in the Income Tax Act 58 of 1962 (ITA), as opposed to “currency” which would have excluded crypto gains from the ambit of capital gains tax (CGT). This means that the intention of the taxpayer, supported by objective factors such as length of holding and frequency of trades, would determine whether the crypto gains are revenue (taxed at a maximum of 45%) or capital in nature (taxed at a maximum of 18%).

Disposal of crypto

The disposal of crypto as a financial instrument is a taxable event. It may, however, be hard for taxpayers to prove that their crypto investment gains fall within the CGT net, as there are no capital deeming rules in the ITA for crypto, such as the three-year rule for equity shares.

In determining the intention of the disposal, SARS may be guided by cases involving the disposal of Krugerrands. In ITC 1525, the taxpayer held Krugerrands for 12 years and the purchase was made with the intention to provide funds for a rainy day. The Krugerrands were sold to inject capital into a new business. In ITC 1526, the taxpayer held Krugerrands from eight months to nine years. They were purchased to provide a store of wealth for the taxpayer’s children and protection from inflation. They were sold for various reasons, including to make improvements on and purchase properties. The Tax Court held in both these cases that the Krugerrands were held on revenue account and subject to income tax rates.

It may thus be practical to use different wallets for trading cryptos and holding cryptos for long-term gains.

Barter transactions

The gain when one crypto (A) is exchanged for another (B) is the difference between the market value of B and the acquisition cost of A. If A was held or acquired on revenue account, the difference will be taxed as income (45%). Otherwise, if held on capital account, the difference will be subject to CGT (18%).

It can be difficult to determine the market value and acquisition cost of crypto in ZAR. We suggest that the spot rate should be used for the transactions. Schedules of rates and transactions should be compiled on the calculated gains or losses on the tax return.

The same principles would apply where the taxpayer has purchased goods or services with crypto. The difference between the market value of the goods or services and the acquisition cost of the crypto would be subject to income tax (45%) or CGT (18%), depending on whether the crypto was held on revenue or capital account.

Assessed losses from trading in crypto may be ring-fenced. It might not be possible to offset these losses against any other income of the taxpayer if the taxable income and losses of that taxpayer (adding back assessed losses from the current and prior year) are more than ZAR 1 577 300 for the 2021 tax year. There are, however, exceptions to this rule.  (Section 20A (2)(b)(ix))

The article goes on to discuss dealings concerning five other possible dealings with crypto, namely staking, mining, forking, airdrops and using it as collateral.

We suggest you read the full article.

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