“While tax compliance in the crypto space has been a murky area until now, SARS and the South African Reserve Bank (SARB) have followed other international jurisdictions in developing stringent regulatory frameworks for this burgeoning segment of the market, with much focus on transparency,” Seccombe says.

Now, there is no longer any doubt that taxpayers are required to disclose their crypto assets – including purchases, current holdings and disposals – as part of their statements of assets and liabilities.

From a tax perspective, cryptocurrencies are not regarded as currencies, but rather as financial instruments. This means crypto holders will need to work out whether their purchases and disposals are treated as trades – the profits on which incur taxes of between 18% and 45% – or their holdings are considered investment assets, meaning capital gains taxes of between 7.2% and 18% would apply.

“Here, it’s important to note that in the digital currency space, there’s no minimum holding period for a crypto asset to be regarded as an investment,” Seccombe says.

For an asset to be regarded an investment for tax purposes, the taxpayer must be able to show that their main intention was not to ultimately sell it at a profit. This can be difficult to prove.

Using equities as an example, the taxpayer would need to show that a share in a company was bought mainly for the dividend income it would produce, with profits on disposal being a secondary goal. In the case of real estate, a property is considered an investment if the main intention of the purchase was for private use or to obtain rental income.

“The same logic applies to cryptocurrencies, and it’s hard to show that a Bitcoin purchase, for example, wasn’t mainly aimed at one day realising a trading profit,” Seccombe says.

“In the current crypto market downturn, taxpayers may be forgiven for celebrating the idea of trade losses. However, they should note that foreign trading losses cannot be used to offset South African income tax, while local trading losses will be immediately ring-fenced should the taxpayer be in the top tax bracket.”

If a taxpayer has objective proof that their crypto assets were bought mainly to diversity their investment portfolio, or that they are generating returns from those assets while holding them, then they will stand a reasonable chance of proving that those assets are held as investments. In this case, any disposals will be treated as capital gains or capital losses. Capital losses suffer none of the ring-fencing provisions that trading losses do.

Thankfully, the tax consequences associated with cryptocurrency mining are a great deal simpler.

Mined crypto assets are regarded as income from services rendered, which should be declared along with other income. Similarly, interest earned from crypto lending arrangements will bear all the same tax consequences as other local or foreign interest returns.

Importantly, it doesn’t matter whether returns from offshore crypto assets are repatriated back to South Africa or not. Either way, there’s a legal requirement that they be disclosed to SARS and taxed locally.

“Now that countries share financial information, crypto holders can no longer hope that SARS will never find out about foreign holdings. Should the tax service discover these assets – an increasingly likely outcome – they will need to pay the relevant taxes plus significant penalties and interest.”

Meanwhile, if cryptocurrencies are received in lieu of goods sold or services rendered, the market value of the crypto assets received in payment is taxed as if it was cash.

Things get more complicated when one cryptocurrency is exchanged for another – for instance, Bitcoin is exchanged for Ethereum.

In this case, to determine tax liabilities, the cost of the Bitcoin holding will be offset against the market value of the Ethereum. To complicate matters further, the cost of the Ethereum acquired via that swap will be considered the equivalent of the market value of the Bitcoin that was exchanged.

Finally, arbitrage trades – for example, purchasing Bitcoin on an offshore exchange and then selling it on a South African exchange – will also have tax consequences. Many of the prices involved will be stated in foreign currencies and must be translated into rands.

With all this in mind, cryptocurrency holders will need to maintain records of purchase costs, as these will determine tax liabilities once assets are sold.

Fortunately, the increased scrutiny on cryptocurrencies globally has prompted a number of companies to specialise in assisting taxpayers with obtaining this information – an example being Koinly.

“From a tax perspective, the cryptocurrency market is now much more complicated,” Seccombe says.

“Consulting a tax practitioner before assets that are undeclared or wrongly declared are picked up by SARS could be a worthwhile undertaking. Remember that should SARS discover prior transactions involving crypto assets, it can go back as many years as they choose and reassess the taxpayer, which could mean hefty penalties and interest.”

Disclaimer

Crypto assets are not yet regulated by the Financial Sector Conduct Authority (FSCA) or any other regulatory body in South Africa and financial advisors are not allowed to provide advice on crypto assets. There has however been progress as the FSCA as part of the Intergovernmental Fintech Working Group (IFWG) comprising of the National Treasury, South African Reserve Bank and Prudential Authority, Financial Intelligence Centre, National Credit Regulator and South African Revenue Services, published “The Draft Declaration of crypto assets” as a financial product under the Financial Advisory and Intermediary Services Act – which made a variety of recommendations pertaining to the regulation of crypto assets. Public comments are currently under consideration.

The fact that the FSCA has not yet regulated crypto assets does not mean that you don’t need to have your tax affairs in order. Therefore, independent investment advisory and wealth management firm, GraySwan, tasked Dianne Seccombe, National Head of Taxation at Mazars, to shed light on the declaration and taxation of crypto asset profits and losses.

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“No one without the requisite knowledge and experience should attempt to handle this alone, a simple misstatement, error, or incorrect interpretation of the law, could unwittingly lead to an investigation by the receiver or even financial penalties,” says Christine Painter, Head of Compliance, at HR and payroll software leader PaySpace.

In addition, she stresses the need for absolute integrity in the relationship between the tax professional and the taxpayer, as this relationship is key to tax compliance.

“Experts in this field need to be able to fully, and clearly outline the tax laws and what the taxpayer’s obligations are. In addition, they must accurately and honestly help taxpayers complete their tax returns, as well as other obligations including PAYE, ETI, SDL and UIF, and should it be needed, honestly and openly interact with SARS on behalf of the taxpayer” Painter said.

However, she cautions that not all tax practitioners are created equally. “According to legislation in South Africa, Section 240(1) of the Tax Administration Act requires that every individual who provides advice to another individual with respect to the application of a Tax Act, or who helps with tax returns on behalf of another person, has to be a registered tax practitioner.”

What this means, she explains, is that the Tax Administration Act of South Africa requires any person who provides tax advice around issues such as PAYE, ETI, SDL and UIF or who assists with the compilation and submission of tax returns on behalf of another person or entity, must be registered as a tax practitioner both with SARS and a Recognised Controlling Body (RCB).

This isn’t optional, Painter says. Section 234(c) is very clear that any person who willfully and without just cause, fails or neglects to register as a tax practitioner, is guilty of an offence, and should they be convicted, face extremely serious consequences. These can range from a hefty fine, to imprisonment for a period of not more than two years.”

In South Africa, a restriction by law is placed on the granting of opinions or interpretations when it comes to matters of tax.

The same holds true in other African jurisdictions; “Tax and labour advisory services are regulated by law across the African continent. This means that consultants should not provide compliance advice related to any legislation or regulatory authority for South Africa, the rest of Africa and the Middle East unless they have registered as a tax practitioner as described above. This includes any sort of assistance with submitting tax returns or other regulatory submissions on a customer’s behalf.”

This is why having a provider such as PaySpace is so key, as it is a payroll software development house with a footprint spanning some 43 African countries. “Moreover, we develop and maintain payroll software that assists our customers in calculating gross to net (and net to gross) payroll, including all statutory declarations that have been determined by in-country taxation laws and tax authorities.” 

Painter says as part of PaySpace’s software offering, the company aims to provide a platform to help its customers comply with all tax authorities and governing bodies, national funds, national pensions and health insurances, social securities, workman’s compensation, training levies, and many more.  “However, it is tax compliance that is at the heart of our offering. Extreme caution and care are taken in providing a software solution that was designed with inherent tax compliance and enhanced with enough flexibility that it can be tailored or tweaked when necessary.”

PaySpace, has been laser-focused, and has invested heavily into providing a software offering that is flexible, and can adhere with precision to the added intricacies of labour law. “We also remain fully committed to providing our customers with excellent product and technical support. Our professional and dedicated teams offer guidance on implementation design, technical and functional support, as well as core tax compliance.”

The company also ensures that it moves with the times, and continually evolves to ensure it delivers innovation within its products. “We will continue to invest in developing our products in line with regulatory requirements and best practice guidance ensuring our solutions meet our customers’ evolving needs.”

For legislative queries, consultants should recommend that customers get in touch with their preferred tax practitioner, auditor, certified business partner or accountant or visit the website of local tax authorities. “For tax return submissions in South Africa, our consultants may only assist with technical support and advice. They may help with employer reconciliation submissions (EMP501) until the point of importing the payroll file into e@syFile and with validation errors.”

In addition, consultants may advise on configuration changes once customers have confirmed with a tax practitioner, auditor, certified business partner or accountant, what the tax implications will be.

So where can customers go for tax advisory services? According to her, customers with a South African payroll will be responsible for their own submissions on e@syFile. “However, if our customers need any assistance with the submission process, or with tax and compliance, we advise them to use a tax practitioner, auditor, certified business partner or their accountant, who can also help them navigate any legislative changes and submission dates. 

Painter says that should customers need further assistance on legislative or compliance-related matters, PaySpace consultants will guide them to the relevant information portals for the information they need to gain clarification and guidance.