Crypto assets can be described as a digital representation of value, not dispensed by a central bank, but rather electronically stored, traded and transferred for investment, payment and other purposes. The underlying technology utilises cryptography techniques.
Income derived from the sale of crypto assets can be revenue in nature, in which case it will be taxed as normal revenue in terms of the “gross income” definition.
On the other hand, said crypto income may be deemed as capital in nature, in terms of the Eighth Schedule to the Income Tax Act, in which case Capital Gains Tax (CGT) will be applicable.
Whether a crypto receipt or accrual is revenue or capital in nature, will depend on various factors such as the taxpayer’s intend, the frequency and volume of transactions, for how long the crypto assets are kept, method of finance, etc. Each case should be considered on its own merits on a case-by-case basis. There are also abundant existing case-law available on the topic of whether a receipt or accrual is revenue or capital of nature.
If crypto income is classified as revenue in nature, a taxpayer may claim qualifying expenses as a tax deduction. Qualifying expenses are expenses incurred for the purpose of trade and in the production of the taxpayer’s crypto income.
If the income is classified as capital in nature, adjustments to the base cost of the crypto asset is permitted, which will increase or decrease capital gains tax, if the asset is sold in the future.
Taxpayers are obligated in terms of the Income Tax Act and the Tax Administration Act to correctly declare all crypto related income in the year its accrues or is received. If the taxpayer fails to do so, he or she may face criminal charges, penalties and interest.
Crypto related income may include:
- Mining crypto assets as a trade or business – This income will be subject to normal income tax. If the total taxable income received from crypto mining exceeds the tax threshold for the tax year, the taxpayer may also be liable for provisional tax.
- Receiving a crypto asset as payment for goods or services – Such income will also be subject to normal income tax.
- Crypto assets received by an independent contractor for performing services – This income will be subject to normal income tax. Deductions against said income may be permissible if incurred in the production of income or for trade purposes. The contractor may also become liable for provisional tax if the taxable income exceeds the tax threshold for the applicable year.
- Crypto assets paid by an employer, as remuneration for services – This income is deemed to be remuneration (as defined) and is subject to employees’ tax/normal tax.
Furthermore, the South African Revenue Service (SARS) can trace crypto asset transactions by, for instance, requiring third party service providers to submit personal information of their clientele as well as their trading activity.
It is therefore of the utmost importance that taxpayers declare all their crypto trading fully and accurately in their tax returns, to avoid any possible sanctions, should SARS discover undeclared crypto income of the taxpayer in the future.
Where a taxpayer has failed in previous years of assessment to declare crypto income to SARS accurately, the taxpayer may consider utilising the VDP (Voluntary Disclosure Program) avenue, to pre-emptively regularise their affairs with SARS.
If you have any enquiries, please contact Petri Westraadt at pwestraadt@fhbc.co.za
Source Reference:
- https://www.sars.gov.za/individuals/crypto-assets-tax/
- SARS: Crypto-FAQs 23 June 2021