Do I have to pay taxes on cryptocurrencies?

Do I have to pay taxes on cryptocurrencies?
The annual tax season is upon us and some are already scrambling to gather slips and bank statements. With that said, we will be taking a look at cryptocurrencies and legislation in South Africa. It is important for South Africans to know what legislation applies when trading with cryptocurrencies. This begs the question: Do I have to pay taxes on cryptocurrencies?

South African Reserve Bank’s stance on cryptocurrencies

The South African Reserve Bank (SARB) published a whitepaper on cryptocurrencies in 2014 titled “Position Paper on Virtual Currencies” to clarify the SARB’s stance on cryptocurrencies.

The SARB refers to cryptocurrencies such as Bitcoin, as crypto assets (CAs). CAs are unregulated, meaning the SARB does not supervise, oversee or regulate them. They are also not legal tender in South Africa. This means that any merchant can refuse to be paid with CAs for services or products and, they are not issued by a bank. They are not backed by the SARB and therefore are independent. However, CAs are legal in South Africa. South Africans may use CAs for trading and as a store of value.

There are no laws that specifically govern CAs in South Africa. However, it is important to know how cryptocurrencies are defined according to the South African law. That way, we can understand which existing laws are relevant to cryptocurrencies.

One such is the Single Discretionary Allowance (SDA) that allows for the purchase of CAs with the R1 million annual allowance. With the SDA, one can arbitrage with cryptocurrencies to earn additional income. If you wish to buy more, the Foreign Capital Allowance (FCA) allows for an annual allowance of R10 million. In order to qualify for this, you have to apply with a tax clearance certificate.

South African Revenue Service’s stance on cryptocurrencies

The South African Revenue Service (SARS) is not very clear on cryptocurrency transactions. They have stated that taxation laws such as possible captain gains tax, apply. It is interesting to note that the word “currency” is not defined in the Income Tax Act. According to a statement issued by SARS on April 2018, this means that they are not regulated by SARS for income tax purposes. SARS classifies cryptocurrencies as “assets of an intangible nature.”

Should the sale of cryptocurrencies that result in a profit, form part of an ordinary business activities, capital gains tax will apply. Alas, it is not as simple as that. There are some factors to take into consideration such as the duration of the trade, the intent, how it was financed etc.

According to the Financial Markets Act of 2020, virtual currencies are not defined as securities and are excluded from regulatory standards that apply to trading with securities. Therefore, cryptocurrencies are categorised as revenue or capital or “gross income” according to SARS.

Do I have to pay taxes on cryptocurrencies?

Yes, SARS expects taxpayers to declare cryptocurrency gains and losses. Whether you made a profit or a loss, it should form part of your taxable income. Did you know you can also claim expenses associated with crypto accruals? Only if these expenses were incurred for the purpose of trading with cryptocurrencies. VAT on cryptocurrencies

SARS does not require VAT registration when performing transactions with cryptocurrencies. VAT is also not charged on cryptocurrencies.

In conclusion, the South African law is very open minded towards cryptocurrencies and blockchain development in general. Several media reports state that even the South African government is looking to implement blockchain technology at some stage in the future. However, it is advisable to consult with a trusted tax/financial consultant when investing in cryptocurrencies in order to stay on the right side of the law.