Does SARS tax crypto assets?

By Koketso Mamabolo

When examining the rising popularity of crypto assets, particularly cryptocurrencies, it’s difficult to imagine a time when they weren’t widely used as a way of storing value. Blockchain technology – which is at the very heart of what has made crypto assets such a disruptive force – is still something not many understand. But financial institutions such as the South African Revenue Service (SARS) have had to rapidly adapt the policy to ensure financial systems cater to crypto assets and ensure they’re properly regulated and accounted for.

What is a crypto asset?

SARS defines a crypto asset as “a digital representation of value that is not issued by a central bank, but is traded, transferred and stored electronically by natural and legal persons for the purpose of payment, investment and other forms of utility, and applies cryptography to techniques in the underlying technology”.

Collaborative effort

Whilst much of the South African public has become aware of the existence of digital representations of value in the last couple of years, financial institutions have been grappling with the issue of ensuring they don’t fall completely outside of traditional financial ecosystems. In 2014, National Treasury released its first statement on crypto assets, in collaboration with SARS, the South African Reserve Bank (SARB), the Financial Sector Conduct Authority (FCSA) and the Financial Intelligence Centre (FIC).

 The initial statement was a warning to South Africans about the risks associated with crypto assets. With the broader fintech industry expanding as the decade progressed, it was not long until an intergovernmental body was formed to ensure the South African government could effectively cater to the changing financial landscape. Two years after the first statement, the Intergovernmental Fintech Working Group (IFWG) was formed, with SARS and the National Credit Regulator (NCR) joining the group in 2019.

“The objective of the IFWG is to foster fintech innovation by supporting an enabling regulatory environment and reviewing both the risks and the benefits of emerging innovations,” says SARS.

In the same year that SARS joined the group, the IFWG released a paper which went through the “benefit and risks of crypto asset-related activities, as well as policy proposals for a regulatory framework”. 

The consultative paper was followed by a position paper in 2020, which was updated in 2021 to “provide specific recommendations for the development of a regulatory framework for crypto assets, including suggestions on the required regulatory changes to be implemented”. 

The position paper makes a total of 25 recommendations for the regulatory framework, and details the journey that would need to be taken to implement the recommendations, as well as assigning responsibilities to the different entities within the IFWG.

Ownership on the rise

4 million – The number of South Africans who own cryptocurrencies

The percentage of owners who hold Bitcoin

The global average of owners who hold Bitcoin

The percentage of SA owners between the ages of 18 and 34

Are crypto assets taxed?

SARS considers crypto assets to fall under the regular personal income tax rules. Crypto asset losses and gains need to be reported the same way traditional assets are. “The onus is on taxpayers to declare all crypto assets-related taxable income in the tax year in which it is received or accrued,” says SARS. “Failure to do so could result in interest and penalties.”

The income from crypto asset transactions can be under gross income, but gains can also be regarded as capital. “Determination of whether an accrual or receipt is revenue or capital in nature is tested under existing jurisprudence (of which there is no shortage).” Expenses can also be claimed. 

SARS categorises gains and losses associated with crypto assets based on three different scenarios. The first is the “mining” of crypto assets, which involves computer-solving algorithms, resulting in the “miner” ultimately being the holder of the crypto asset, such as cryptocurrencies like Bitcoin. The second involves investors trading currencies, such as the Rand, for crypto assets, whether it’s through private transactions or asset exchanges. 

The third scenario is when crypto assets are exchanged for goods and services. “This transaction is regarded as a barter transaction. Therefore the normal barter transaction rules apply,” says SARS.

What’s next for the regulatory framework? When it comes to cryptocurrencies, South Africans can expect significant changes to how they are regulated, with the Reserve Bank and FCSA expected to implement new regulations in the next year and a half.

This article originally appeared in the October edition of Public Sector Leaders. Enjoy your complimentary copy:

Sources: 

SARS | Tech Cabal | BusinessTech