Bitcoin was the subject of many a conversation at the weekend braais all over the country last year. A number of people invested early in Bitcoin and excitedly told their friends they had to invest too.
Others woke up a bit late and were sorely disappointed when they invested and made some devastating losses. What many people did not think about while they were caught up in a frenzy, was how SARS regulates cryptocurrencies.
The taxman has made it clear that normal income tax rules apply to cryptocurrencies. Taxpayers must declare any losses or gains. If they don’t declare their gains, this could result in interest and penalties.
SARS made the decision to treat cryptocurrencies as intangible assets. They are not a currency like the rand but are treated rather like shares instead.
The reasons SARS gives for its stance is that cryptocurrencies are not official tender in South Africa and they are not widely used in South Africa as a medium of exchange or payment.
Some taxpayers are still in a state of denial and seem to believe that SARS won’t come after them for their earnings. For those who lost on their investments, the good news is that they could benefit from declaring their losses.
A New FinTech Unit
SARS has partnered with the South African Reserve Bank (SARB) which has a FinTech unit, established to review its position on cryptocurrencies, develop a regulatory framework and experiment with blockchain and distributed ledger technologies (DLTs). In June 2018, the FinTech unit released its first report on ‘Project Khokha’, an experiment using distributed ledger technology and a tokenized South African Rand.
Ratings agency, Moodys, approves of the adoption of FinTech infrastructure and regulations. It sees this as a way for South Africa to deal with money-laundering practices, strengthen global competitiveness and increase efficiency.
Understanding different cryptocurrency transactions
Any income you have received or accrued from cryptocurrencies is taxable. Are you involved in the process of mining? Are you using cryptocurrency to buy goods and services? Are you trading with cryptocurrencies?
If you acquired cryptocurrency to actively trade with it, it will affect your gross income. If you acquired cryptocurrency as a long-term investment and you intend to keep it for many years, it will affect your capital gains tax.
How to declare it
In your gross income, you must include income you received from trading with cryptocurrency. You can deduct expenses associated with this and you will be taxed according to the normal tax tables, depending on your tax bracket. You can set off your losses against other trading income.
Under capital gains, you will need to include your proceeds from selling cryptocurrency and deduct the base cost, such as purchase price and broker’s fee.
The decision to cryptocurrencies as intangible assets may give rise to all sorts of tax legislation to solve disputes over when a cryptocurrency was held on a revenue or capital account.
To sum up
Any South African investor who spotted an opportunity when Bitcoin declined sharply in value, bought low and then sold after a month or two, is liable for tax on the ordinary income scale. Gains over a longer period are subject to capital gains instead. This is like a house or share that’s appreciated over a long term.
SARS regulations are likely to change in the future as it starts incorporating cryptocurrencies in a more specific manner. However, in the interim, don’t neglect to include your crypto earnings and losses in your returns or you may find yourself subject to crippling penalties and interest when SARS catches up with you.