You can’t deny that there is a lot of hype and interest about Cryptocurrencies at the moment. One of the loudest questions being asked right now is, are Cryptocurrencies taxed?
Many South Africans have made millions with Cryptocurrencies recently and everyone is asking, is there a SARS Cryptocurrency tax? The answer is, yes, there is indeed. The taxman said in an April 2021 statement that there will be a SARS Cryptocurrency tax.
“South Africans will be taxed on all earnings from cryptocurrencies.” Although there wasn’t much more information given than that, SARS explained that existing regulations should provide taxpayers with more than enough guidance on how they will be taxed. SARS commissioner Edward Kieswetter confirmed that undisclosed cryptocurrency holdings will be a big area of focus for the tax agency in 2021.
With the new tax season upon us, let’s uncover what to expect regarding the taxation of Cryptocurrencies.
SA Cryptocurrency taxes, in short
SARS considers Cryptocurrencies to be “assets of an intangible nature” as opposed to currency or property. That means income received or accrued from Cryptocurrency falls under “gross income”. However, under certain circumstances, gains may be considered capital under the Eighth Schedule to the tax act.
The tax rules for Cryptocurrency allow for deducting costs. So, with regards to income, taxpayers may claim expenses on their taxes. In the case of Capital Gains Taxes, you only pay capital gains on any appreciation of your Cryptocurrency from the cost of the purchase price.
Capital gains Cryptocurrency taxes
SARS specifies that “investors can exchange local currency for a Cryptocurrency (or vice versa) through private transactions or by using Cryptocurrency exchanges”. Cryptocurrency exchanges are essentially markets for cryptocurrencies.
These regular cash transactions will need to be reported on the Provisional Tax return (IRP6). For tax purposes, short-term trading activity to earn daily wages is deemed income, while long-term investments (typically over three years) are subject to capital gains taxes.
What is the best way to document your Cryptocurrency transactions? SARS says that conventional receipts and/or invoices will suffice. Cryptocurrency transactions won’t go through any more scrutiny than typical payment or receipt activity.
Are there recommended accounting methods for Cryptocurrency? SARS noted that the Cryptocurrency “purchase price is determined on the earlier receipt and accrual date. Cryptocurrency is not regarded as a share, and therefore SARS does not treat it as the average for the year.” In other words, a first-in, first-out approach is better than the average cost or last-in, first-out accounting method.
Tax on Cryptocurrency exchanged for goods or services as income
The 2018 SARS guidelines specify that “goods or services can be exchanged for cryptocurrencies. This transaction is regarded as a barter transaction. Therefore, the normal barter transaction rules apply”. In other words, this Cryptocurrency is taxed as income to be reported on the ITR12 form.
Cryptocurrency mining taxes
The tax treatment of Cryptocurrency mining activity falls under both standard cash and barter transaction rules. This means Cryptocurrency miners are first taxed when they acquire the Cryptocurrency in line with income taxes. According to SARS guidelines, “a cryptocurrency can be acquired through so-called ‘mining’.
What is Cryptocurrency mining? Mining is conducted by verifying transactions in a computer-generated public ledger, achieved through the solving of complex computer algorithms. By verifying these transactions, the ‘miner’ is rewarded with ownership of new coins, which become part of the networked ledger. This gives rise to an immediate accrual or receipt on successful mining of Cryptocurrency.
While the initial receipt of Cryptocurrency through mining is treated as income for tax purposes, SARS treats the subsequent disposition of the Cryptocurrency under a different set of tax rules.
Their 2018 guidelines state that “until the newly acquired cryptocurrency is sold or exchanged for cash, it is held as trading stock which can subsequently be realized through either a normal cash transaction…or a barter transaction.”
These are the same tax regulations that it designates for Cryptocurrency investments and transactions in exchange for goods and services.
What must be declared?
Many people seem to think their Cryptocurrency transactions only need to be declared once they are cashed out. That is not true.
You must report all cryptocurrency transactions, including:
- If you bought any Cryptocurrency or exchanged Cryptocurrency for another Cryptocurrency, it must be declared on your tax return.
- You must state if you mined Cryptocurrency.
- You must report if you were in any way paid in Cryptocurrency.
How much tax will I pay?
If you are a short-term investor or trader in Cryptocurrencies, you will pay tax at your personal income tax rate (which can be upwards of 40%). For longer-term investors, capital gains tax (18% for individuals) is payable.
Consider the experts
Need to declare your Cryptocurrency holdings or want to find out more about SARS Cryptocurrency tax? Give us a call, and we can help you through the process. Dirmeik Consulting has an extensive understanding of tax and VAT laws and can give the correct and up-to-date advice on all your tax matters. We make sure to keep up to date with any new rules or regulations made by SARS.
Dirmeik’s tax experts can advise on all South African tax matters and endeavour to create the best solution for you and your business. Get in touch with us on our website.