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Crypto assets: Are you prepared for the taxman?

AUTHOR: DIANE SECCOMBE, NATIONAL HEAD OF TAXATION AT MAZARS ACADEMY – Article sponsored by GraySwan

SARS and SARB have been quick to follow other international jurisdictions in seeking greater transparency, regulatory framework and disclosure in respect of crypto assets. Changes have been made to individual and corporate tax returns, where specific reference is now made to crypto assets. These changes ensure there is no doubt about the requirement to disclose both annual transactions involving crypto and ownership of the asset.

From a tax perspective, crypto assets are not regarded as currency but rather as a “financial instrument”. Transactions involving crypto can roughly be broken down into three categories. Firstly the purchase and disposal of crypto. Secondly, returns made from the crypto asset itself and thirdly, a taxpayer rendering a service or selling goods (locally or offshore) and receiving payment in the form of crypto assets. The tax consideration of each of these categories must be fully understood. Resident taxpayers must take into account both local and offshore transactions.

In respect of the purchase (or acquisition by swap or exchange) of crypto, a record must be kept of the acquisition cost. When crypto assets held, are disclosed in a statement of assets and liabilities for SARS, they must be disclosed at cost. A taxpayer will also bear the burden of proving the cost when the tax calculation is done (and disclosed) on disposal of the crypto asset. As it is the disposal of the crypto asset which will trigger an actual tax consequence, care must be taken in respect of the concept of a disposal. The concept extends a lot further than when a holder of a crypto asset cashes out back into the relevant fiat currency. Included will be when one crypto is swapped (exchanged) for another, for example Bitcoin for Ethereum. The cost of the crypto asset swapped out (eg Bitcoin), will be set off against the market value of the new crypto asset acquired (eg Ethereum) in the swap to determine the tax. To complicate matters further the cost at which the acquired crypto asset (eg Ethereum) is held will be the market value of the crypto asset swapped out (eg Bitcoin). As complicated as that process may feel to even read, obtaining the relevant values to use in the tax calculation is even worse. The common practice of arbitrage, for example taking funds out of South Africa, purchasing crypto assets on an offshore crypto exchange or platform, returning the crypto assets to South Africa and disposing of them via a local crypto exchange or platform will also have tax consequences and require tax records. Many of the costs, market values and selling values will also be stated in various foreign currencies and have to be translated into Rands.

Fortunately, the increased disclosure required by SARS (and revenue authorities across the globe) and the resultant need for tax return appropriate transaction records has created a number of platforms that specialize in assisting taxpayers with obtaining this information, an example being Koinly (https://koinly. io/) amongst others.

Once all the relevant tax records have been acquired, on the disposal of crypto assets, what tax is payable? Is the purchase and disposal treated as a trade, giving rising to a taxable profit (18% to 45% tax) or trade loss? Or will the result be a more tax efficient capital gain (7.2% to 18% tax) or capital loss as a result of the crypto being regarded as an investment asset? Sadly, many holders of crypto assets do not understand the difficulty they will have discharging the burden of proof that they are not in fact trading with their crypto assets, and therefore creating trade profits and losses on disposal.

The first myth to dispel is that there is any minimum holding period for a crypto asset to be regarded as an investment asset. The well-known “three year” rule does not apply to crypto. SARS has indicated that in order to prove whether crypto assets are held as trading stock or investment assets we have to return to the same basic tax principles used with all other assets.

For an asset to be held as an investment asset for tax purposes the taxpayer must be able to show that at the time of purchase, ownership and disposal the sole or main intention of the taxpayer was not only to sell the asset at a profit, another more dominant intention was present as well. Take equity for example: the taxpayer would show the equity was purchased mainly to obtain the expected dividend return and secondary to that, to sell at a profit at a later stage. Immovable property would be regarded as an investment if the main intention was to use the property for private purposes or to obtain rental income, while of course there is a secondary intention to sell at a profit at a future date. In respect of crypto, a dominant intention other than to merely sell the asset at some stage in the future (however distant) at a profit is hard to prove. As a result, SARS is easily winning the argument that disposals of crypto give rise to a trade profit or loss.

In the current crypto market downturn taxpayer’s may be forgiven for celebrating the idea of trade losses, but will do well to recall that foreign trade losses cannot be set off against South African taxable income and local trade losses from crypto assets will be immediately ring-fenced should the taxpayer be in the top tax bracket for the relevant year of assessment. If not in the top tax bracket, losses will not be ring-fenced. If a taxpayer has objective proof that their crypto assets are merely a diversification of an established investment portfolio or that returns are being obtained from their crypto assets like for example staking rewards or interest, then a taxpayer will stand a reasonable chance of proving the crypto was held as an investment asset and the disposal taxed as a capital gain or capital loss. Capital losses suffer none of the ring-fencing provisions that trade losses do.

The tax consequences and disclosure in respect of the second category of crypto transactions is a great deal simpler. New crypto assets received as mining rewards will be regarded as income from services rendered, and the market value of the mining reward will have to be included along with all other income. Interest earned from crypto lending arrangements will bear all the same tax consequences as other local or foreign interest returns. Importantly, whether these returns from crypto assets are repatriated back to South Africa or not, does not affect the legal requirement they be disclosed to SARS in the slightest and subject to tax here. Playing the “how will SARS know” game in the light of the local and international focus on methods to obtain information on these transactions is guaranteed to end in a SARS audit, the tax payable anyway plus up to 200% penalties and interest.

In the last and third category, of a taxpayer rendering a service or selling goods (locally or offshore) and receiving payment in the form of crypto assets, the market value of the crypto assets received in payment is as taxable as if they were invoiced and paid for in cash with all the attendant tax and disclosure requirements. Taxpayers must realise the time to regularize their crypto assets with SARS has come. Statements of assets and liabilities must show crypto assets held and all disposals (past and present) disclosed to SARS. Should taxpayers find themselves with potential outstanding taxes as a result then a tax practitioner must be consulted before the matter is picked up by SARS and the benefit of an application under the voluntary disclosure programme considered. Should SARS discover prior transactions involving crypto assets, SARS can go back as many years as they choose and reassess the taxpayer on each past year of assessment on the transactions relevant to that year, with the attendant penalties and interest.

Structured Products

Structured Products

Structured products: build in downside protection Structured products are pre-packaged fixed-term investments that provide private investors with easy access to offshore equity and commodity markets, with a pre-defined risk and return profile over a pre-defined...