The South African Revenue Service turns its attention to crypto tax avoiders.
Clients of financial advisers considering dipping their toes into the crypto pool must be aware of their tax obligations, as the taxman puts crypto tax avoiders firmly in its sights.
The South African Revenue Service (Sars) considers any gains on crypto assets taxable, even if the funds are not readily in one’s account and remain on a crypto exchange or platform, according to crypto investment platform Luno’s SA country manager Christo de Wit.
‘Trading in crypto assets – whether buying, selling, trading and/or earning payouts on the amount an investor is staking – may be considered taxable, where Sars considers profits from crypto assets as capital gains or personal income and depending on your personal circumstances,’ De Wit said in an interview with Citywire South Africa.
He explained that Sars has different rules for the various types of crypto asset users, depending on several factors, including if they’re considered a crypto asset ‘investor’ or ‘trader’ and other details relating to one’s income. Traders are typically taxed on revenue income, while investors will pay capital gains tax (CGT).
‘It is possible for a single taxpayer to be classified as both a trader and an investor,’ De Wit said. ‘Broadly speaking, the bracket you fall into will depend on your personal circumstances and the types of activity you have engaged in.’
Luno encourages investors to engage tax professionals who understand the complexities of taxing crypto assets.
Old Mutual Wealth chief investment strategist Izak Odendaal told Citywire SA that Sars generally treats crypto just like any other kind of investment.
‘If you primarily hold an asset for the long term (more than three years), it is treated as capital, and you pay CGT on disposal,’ Odendaal said. ‘If you’re deemed to be “trading”, only buying and selling for a profit, it will be treated as income tax. In the latter case, the test is generally whether the investment is held for less than three years.
‘The main thing is that Sars absolutely expects you to declare your crypto investments and pay applicable tax. It is in touch with all the major [crypto] exchanges, and you should expect them to find out about your crypto investments eventually.’
No safety in non-disclosure
After asking crypto exchanges and those involved in trading or holding crypto assets to disclose related activities voluntarily, Sars stated in an October 2024 release that it would include crypto assets in its compliance programmes.
Crypto asset service providers (Casps) must be licensed by the Financial Sector Conduct Authority (FSCA) under the Financial Advisory and Intermediary Services Act. As such, Sars is engaging with the FSCA on providing information on crypto assets and trades from registered Casps.
Sars also receives information directly from local crypto exchanges and exchanges information with other tax authorities globally through multilateral agreements.
‘The provision of offshore crypto accounts will be the subject of a multilateral agreement to be signed by ministers of finance in November 2024, which will catalyse the cross-jurisdictional exchange of such information in respect of South African taxpayers,’ Sars stated.
National Treasury is yet to share details on whether this agreement was signed.
Sars added that its audit teams were increasing their capability to enforce crypto tax compliance for more efficient tax revenue collection from crypto traders and investors.
‘Sars has resorted to greater use of artificial intelligence, machine learning and algorithms to process our work,’ it said. ‘Sars has recently issued query letters to taxpayers with crypto assets. These letters aim to gain an insight into taxpayers’ investment in crypto assets and the trades undertaken to enable Sars to assess taxpayers’ compliance in this regard.’
There’s also false security in thinking that blockchain transactions are entirely anonymous and allow investors to evade tax.
A recent Luno release cited Wiehann Olivier, a Forvis Mazars South Africa partner and its fintech and digital asset lead, as saying that most blockchains are ‘public ledger’, namely that all transactions are visible and cannot be deleted.
‘Sars may engage with exchanges and request transactional data, as well as data-matching techniques to trace transactions back to taxpayers, and they can go back further than five years,’ the Luno release stated.
According to De Wit (pictured below), Sars requires detailed records of transactions, including acquisition and disposal dates, amounts, and transaction types, to be kept for at least five years. These records are essential for accurate tax reporting, and failure to maintain them can lead to discrepancies during tax assessments.
According to an internal article by Jashwin Baijoo, associate director and head of strategic engagement and compliance at Tax Consulting SA, historical transactions are not safe either.
‘Those who hold, or have ever held, crypto, should not assume that historical non-declaration means that Sars will not look to tax these profits in future,’ Baijoo wrote.
‘Not only will a review of these historical transgressions be conducted, but should the crypto trader under the radar not comply, severe penalties, or even jail time is immediately on the cards, per section 234 of the Tax Administration Act.’
As such, Baijoo said taxpayers should make full disclosures to Sars on local and foreign crypto transactions for verification.
In this regard, Sars encourages affected taxpayers to use the Sars Voluntary Disclosure Programme (VDP) to be compliant.
Offshore safety?
Until recently, investors may have believed that offshore crypto trades would evade the taxman, but Sars is gaining ground here, too.
In November 2023, SA was among 46 countries, including the UK overseas territories Cayman Islands and Gibraltar, which agreed to implement the Crypto-asset Reporting Framework (CARF) by 2027.
The Organisation for Economic Co-operation and Development developed CARF as an international standard for the automatic exchange of information between tax authorities, which provides guidance on how to report cryptocurrency transactions.
Sars said at the time that CARF’s implementation would further improve its ability to ensure tax compliance and clamp down on tax evasion.