What is it?
A crypto asset is a digital representation of value that is not issued by a central bank, but is traded, transferred and stored electronically by natural and legal persons for the purpose of payment, investment and other forms of utility, and applies cryptography techniques in the underlying technology.
According to the Explanatory Memorandum on the Taxation Laws Amendment Bill as issued on 20 January 2021 the word “cryptocurrency” was replaced with “crypto asset” in line with the proposed adoption of a uniform definition of crypto assets within the South African regulatory framework.
How did we get here?
The process to understand and document crypto assets in South Africa started in 2014:
- 2014: The initial public statement alerting the public to the risks of crypto assets was issued by National Treasury (NT) in a joint initiative with the South African Reserve Bank (SARB), the Financial Services Board (now the Financial Sector Conduct Authority (FSCA), the South African Revenue Service (SARS) and the Financial Intelligence Centre (FIC).
- 2016: The Intergovernmental Fintech Working Group (IFWG) was established, comprising members from NT, SARB, FSCA and FIC. The objective of the IFWG is to foster fintech innovation by supporting an enabling regulatory environment and reviewing both the risks and the benefits of emerging innovations.
- SARS issued a media release to clarify its stance on the tax treatment of crypto-currencies.
- SARS published a list of FAQs (reviewed in 2021).
- The National Credit Regulator (NCR) and SARS joined the IFWG.
- The IFWG released a consultation paper on crypto assets. The consultation paper highlighted the perceived benefits and risks of crypto asset-related activities, as well as policy proposals for a regulatory framework.
- 2020: The IFWG released a position paper on crypto assets (updated 2021). The purpose of the position paper is to provide specific recommendations for the development of a regulatory framework for crypto assets, including suggestions on the required regulatory changes to be implemented.
- 2021: The position paper released in 2020 is being used as input into the proposed Regulations and a policy on crypto assets. Note that SARS is only one of many role-players in South Africa, and the South African Reserve Bank (SARB) is taking the lead in the formulation of these documents. Since the crypto industry is relatively new, SARB said it is in the process of developing its own set of rules that could allow its clients to transfer assets abroad. Until the regulation is fully established, it is illegal for crypto users to transfer funds abroad, according to SARB.
Do I need to pay tax on crypto assets?
Yes, normal income tax rules apply to crypto assets and affected taxpayers need to declare crypto assets’ gains or losses as part of their taxable income.
The onus is on taxpayers to declare all crypto assets-related taxable income in the tax year in which it is received or accrued. Failure to do so could result in interest and penalties.
How will it work?
Following normal income tax rules, income received or accrued from crypto assets transactions can be taxed on revenue account under “gross income”.
Alternatively such gains may be regarded as capital in nature, as spelt out in the Eighth Schedule to the Act for taxation under the Capital Gains Tax (CGT) paradigm. Determination of whether an accrual or receipt is revenue or capital in nature is tested under existing jurisprudence (of which there is no shortage).
Taxpayers are also 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 for purposes of trade.
Base cost adjustments can also be made if falling within the CGT paradigm. Gains or losses in relation to crypto assets can broadly be categorised with reference to three types of scenarios, each of which potentially gives rise to distinct tax consequences:
- Crypto assets can be acquired through so called “mining”. Mining is conducted by the verification of transactions in a computer-generated public ledger, achieved through the solving of complex computer algorithms.
- Investors can exchange local currency for a crypto asset (or vice versa) by using crypto assets exchanges, which are essentially markets for crypto assets, or through private transactions.
- Goods or services can be exchanged for crypto assets. This transaction is regarded as a barter transaction. Therefore the normal barter transaction rules apply.
See an example of the Income Tax Return (ITR12) form for the 2020/21 tax year and below print screens where crypto assets are mentioned:
How is SARS tracing crypto asset transactions?
Legislatively, SARS is granted a wide range of collection powers in terms of the Income Tax Act, including a requirement for third-party service providers to submit financial data. Enforcement and audit processes are confidential and not shared with members of the public.