The South African Revenue Service (SARS) has issued a strong warning to all taxpayers holding digital currencies, underscoring that failing to declare crypto assets on tax returns will not be tolerated. SARS has expressed growing concern over the non-compliance of crypto holders and is taking steps to enhance its monitoring and enforcement capabilities, ensuring that all income derived from cryptocurrency is properly reported.
Michael Rushby, MD of leading tax and audit firm, Galbaith Rushby notes: “SARS estimates that over 5.8 million South Africans currently hold crypto assets, yet many have not included these in their tax filings.” To address this, SARS is working closely with the Financial Sector Conduct Authority (FSCA) to obtain data from registered crypto asset service providers (CASPs) and is already receiving information from local exchanges he adds.
In a recent article, SARS Commissioner Edward Kieswetter emphasised the need for compliance, stating: ‘SARS is committed to ensuring that all taxpayers meet their obligations. Those evading taxes are adding to the burden of compliant taxpayers.’ He also noted that SARS is using advanced technologies, such as artificial intelligence and machine learning, to identify non-compliant taxpayers. “In its efforts to address non-compliance, SARS has expanded its audit teams and begun issuing query letters to taxpayers identified as holding crypto assets,” says Rushby.
SARS is also encouraging taxpayers to utilise the Voluntary Disclosure Programme (VDP) to regularise their tax affairs before being audited. Once a taxpayer is selected for audit, they will no longer qualify for VDP relief. As Kieswetter firmly stated, ‘SARS will pursue non-compliance without fear, favour, or prejudice.’
How does this affect you:
Holding crypto assets is not an illegal activity and, in many instances, it is not even a disclosable activity. You would only need to disclose Crypto assets in the following instances
- You are required to disclose assets and liabilities (you are a director of a company or earn business income),
- You have sold any Crypto assets or exchanged any Crypto assets, a disposal event is a disclosable event,
But just holding Crypto in an exchange or wallet is not something that affects your tax in any way.
How will SARS know:
Registered financial service companies are required to disclose to SARS movements within all bank accounts in SARS on an annual basis. Currently Crypto exchanges are not required to do that but SARS have approached the local exchanges to get data about transactions that have happened. Luno was approached last year according to media reports and presumably the other local exchanges have been as well. It is unclear how SARS would get the information from foreign exchanges other than applying The Common Reporting Standard (CRS) rules with countries which are signatories thereto or normal DTA information sharing agreements.
How will it be taxed:
SARS has different rules for different types of crypto asset users, which depend on a number of different factors including if you are considered a crypto asset ‘investor’ or ‘trader’ as well as other details relating to your income:
- Traders are typically taxed on revenue income; whereas
- Investors will pay capital gains tax
“The bracket you fall into will depend on your personal circumstances and the types of activity that you have engaged in. It’s important to understand when transactions involving assets, including crypto, are subject to capital gains tax (CGT) versus normal income tax,” cautions Rushby.
The distinction depends largely on the nature of the transaction and the intent behind acquiring and disposing of the asset.
- Capital Gains Tax (CGT): If you hold an Crypto asset for investment purposes and later dispose of it at a profit, it is likely that the gain will be subject to CGT. The key factor here is whether the asset was held for long-term capital growth. For individuals, only 40% of the gain is included in taxable income (60% is tax free) and taxed at their marginal tax rate.
- Normal Income Tax: If an asset is acquired with the intention to trade or it forms part of your regular income-generating activities, any profit from the sale would be subject to normal income tax. This is more common with assets that are bought and sold frequently, such as when engaging in day-to-day crypto trading. In this case, the full profit is included in taxable income.
Determining whether a transaction falls under CGT or income tax can be complex, especially with assets like cryptocurrency. Rushby urges tax payers, particularly those holding crypto assets, to consult with their tax advisors to ensure that their tax affairs are in order and that they are not at risk of non-compliance.
Author: Michael Rushby
