CRYPTOCURRENCIES have gained more interest over the last few years, thus also attracting the attention of tax authorities worldwide who are coming to the party to claim their share. The South African Revenue Service (Sars) commissioner has confirmed that undisclosed cryptocurrency holdings will be a big area of focus for the tax agency this year.

Sars has already included questions about cryptocurrency investments in the capital gains tax portion of tax returns, creating source codes for cryptocurrency-trading profits (2572) and losses (2573), respectively.

Some taxpayers have already received audit letters that request that they provide reasons for their cryptocurrency investments, and provide letters from trading platforms confirming their investments.

The tax implications of cryptocurrency trading and investing remains unclear due to the complexity around crypto-related transactions.

What must I declare?

All cryptocurrency transactions must be declared – not only if you cashed out. If you bought any cryptocurrency or exchanged cryptocurrency for another cryptocurrency, it must be declared on your tax return. You must also state if you mined cryptocurrency. And Sars is very clear that you need to declare it if you were in any way paid in cryptocurrency.

How will income from Cryptocurrency be taxed?

Sars doesn’t view cryptocurrency as a currency. It views it as property, like your car or house. That distinction has not been tested in court yet, though.

If you made money from your cryptocurrency investment, it can either be taxed as income or attract capital gains tax.

A capital gain is an increase in the value of any asset held, whether it be stocks, real estate or, in this case, ownership of cryptocurrencies. A capital gain is only realised from a tax perspective when the asset is sold.

It is important to differentiate between a short-term gain, where the asset is held for less than a year and taxed at a higher marginal tax rate, and a longer-term gain, where the sale will be taxed at capital gains tax rate.

Here is the generally accepted rule:

If you are making profits from trading crypto, this will be deemed as income and taxed at your marginal tax rate (on a sliding scale up to a maximum of 45 per cent);

If you buy and hold crypto for an extended period and then sell at a profit, capital gains tax (CGT) will apply. (Your capital gains get added to your annual pre-tax income. The CGT rate can range from 7,2 per cent to 18 per cent, depending on the tax bracket you’re in.)

If you were paid for your services in cryptocurrency, this will be considered to be remuneration for tax purposes and is subject to normal tax.

Beyond this, there are vast areas of uncertainty. Sars has yet to issue specific guidelines on the treatment of crypto but it is starting to pay closer attention to this emerging asset class, and further guidelines are expected in due course.

What are the penalties if I don’t disclose Cryptocurrency income?

Taxpayers who fail to correctly disclose their cryptocurrency-related income or comply with an audit request by Sars may be convicted for an offence and be liable to a fine or imprisonment for up to two years.

Please note that the above is for information purposes only and does not constitute tax advice. As each individual’s personal circumstances vary, we recommend they seek advice on the matter. Please note that while every effort is made to ensure accuracy, Nexia SAB&T does not accept responsibility for any inaccuracies or errors contained herein. If you are in doubt about any information in this article or require any advice on the topical matter, please do not hesitate to contact any Nexia SAB&T office nationally.