The South African Revenue Service (Sars) is determined to get its cut from those who have profited off cryptocurrencies.
And the revenue service is depending on crypto users to volunteer access to their digital wallets.
At their inception, cryptocurrencies were lauded as a decentralised form of internet money that could be used, traded and hoarded almost entirely anonymously – essentially keeping governments out of your finances.
But if wallet holders are hoping this will throw off the tax collectors, they’re in for a rude awaking.
“There will be hefty penalties which include jail time on top of additional financial penalties,” explained Thomas Lobban, legal manager for cross-border taxation at Tax Consulting South Africa.
It’s a well-known fact that government is scrambling to keep the country’s coffers above the bottom of the barrel.
There have been many attempts to increase taxes in recent months, including proposed tax increases to fund a basic income grant.
That’s bad news for those who rode the bull market and profited off crypto activities such as hodling, trading, mining and staking.
“You need to declare your crypto assets in your annual tax returns each year. Sars has now included crypto assets under the ‘Statement of Local Assets and Liabilities’ section of the ITR12 annual tax return form,” said Lobban
This means that all individuals who have acquired and held crypto assets during the tax year must disclose these holdings to Sars in their returns, regardless of whether any taxable events took place.
“Tax in relation to crypto-assets will arise in view of disposal, which occurs when a crypto asset is sold for money or another asset such as a crypto asset. Tax will also be levied on the value of crypto assets that the user obtains in the form of a reward [such as crypto staking or interest] or other compensation [for example, payment of crypto for goods and/or services].”
But calculating crypto profits and/or losses can be tricky because it depends on crypto exchanges to provide the necessary information to track and trace transactions.
“To determine the tax on crypto assets, it must first be determined whether it will be capital [the maximum effective tax rate of 18% for individuals] or revenue in nature [up to 45% for individuals],” explained Lobban.
When taxing crypto revenue, number crunchers will weigh the proceeds from crypto transactions (in ZAR) minus the expenses incurred from trading to determine the profit included in their taxable income.
Cryptocurrencies are considered a risky investment because of their volatility and unpredictability.
Lobban said the market value of crypto assets (in ZAR) will be taken into account at the time of each transaction.
“A profit based on market values may not be later treated as a loss for tax purposes.”