Home Practice Management Sars joins the global rise of crypto-wars

Sars joins the global rise of crypto-wars

321
0

By Prenisha Govender, Associate and Keketso Kgomosotho, Candidate Attorney, Tax Practice, Baker McKenzie Johannesburg.

The growing popularity of cryptocurrencies worldwide, which is increasingly leading to its stronger footing in international business, has awakened tax authorities everywhere to a possible new revenue stream from unreported gains. Over recent years, we’ve seen a marked increase in crackdowns on cryptocurrency traders – all the way from the Internal Revenue Service (IRS) in the United States (US) to Her Majesty’s Revenue & Customs (HMRC) in the United Kingdom (UK), and now the South African Revenue Service (Sars).

It was only a matter of time until Sars joined the party, given that in terms of both market value and volume, South Africa is reported to be one of the top two markets for cryptocurrencies in Africa, alongside Nigeria. Since cryptocurrencies are specifically intended to facilitate peer-to-peer transactions anywhere in the world on an anonymous basis, they open up opportunities to bypass the taxman’s clutches. Recently, however, Sars has joined a number of other tax authorities across the globe in looking closely at ways to track gains made by traders in cryptocurrency, while establishing appropriate tax frameworks. In other jurisdictions such as the UK, authorities are investing in cryptoanalysis technology, which will enable them to track cryptocurrency trading.

Even though Sars considers cryptocurrencies as neither official South African tender nor widely used and accepted in South Africa as a medium of exchange (i.e. not regarded as a currency for income tax purposes or capital gains tax), it does consider cryptocurrencies as an asset of an intangible nature. In terms of section 223 of the Tax Administration Act, 2011, it currently appears that any taxpayer who intentionally omits to declare their gains or profits will be penalized by up to 200 percent of the amount owed, plus interest.

Recently, Sars reportedly sent audit requests to taxpayers requesting them to disclose cryptocurrency trades and purchases. We’ve seen similar trends in other industries, most recently in the online accommodation-booking businesses. This is of course in keeping with SARS’ campaign for stronger enforcement in the wake of Covid-19. However, tracking these anonymous virtual currency trades remains a major challenge. Following the collapse of Mirror Trading International Ltd. (a bitcoin BTCaac, +3.57% trading club) in what is considered to be South Africa’s largest Ponzi schemes, the Financial Sector Conduct Authority is calling for formal regulation for cryptocurrencies, and more powers to probe traders.

Similar trends can be seen elsewhere. In mid-2019, the IRS announced that it had begun sending letters to taxpayers who may have failed to properly report income and pay any tax associated with cryptocurrency transactions, or who did not properly report such transactions. In November 2020, the US Department of Justice announced that, under a mutual legal assistance treaty request from Brazil, it had seized virtual currency worth an estimated USD 24 million. The UK tax authorities employed the same approach, requesting customer information from cryptocurrency exchanges in an effort to recover taxes. The Nigerian central bank employed a more aggressive posture, ordering the closure of accounts involved in the transfer or exchange of cryptocurrencies at the start of February 2021, under the threat of severe regulatory sanctions. While in India, the country’s parliament is introducing legislation that would largely ban the use of private cryptocurrency. Media reports recently noted that cryptocurrency investors in India will be given a transition period of three to six months after the implementation of the new law to liquidate their investments.

Sars’ position on cryptocurrencies is that it should be taxed, depending on the intention with which it is held. Therefore, gains or losses in relation to cryptocurrencies can be broadly categorized as having three potential consequences:

  • A cryptocurrency can be acquired through mining, but until the newly acquired cryptocurrency is sold or exchanged for cash, it will be held by the miner as “trading stock.”
  • Investors buying and selling cryptocurrencies on exchanges will be liable for the capital gains earned by the investor.
  • Where goods or services are exchanged for cryptocurrencies, the normal barter transaction rules will apply.

The reality is that virtual currencies are gaining a stronger footing in the domestic market as well. Two mainstream retail brands have, in the past, accepted bitcoin as a method of payment, although it is unclear whether this remains the case. There are already seven bitcoin ATMs in South Africa, the most in any African jurisdiction.

It is worth noting that cryptography often functions on the premise of a secure web, facilitating secure transactions through e-commerce and online banking, and forming the foundation of innovation in the modern economy. SARS and other tax authorities should therefore be prudent not to stifle possible innovation that may develop from cryptocurrency use.

Given the circumstances, it would not be surprising if SARS introduced new regulations with a focus on digital assets and currencies, which will most likely make it more difficult to avoid tax by requiring all South African cryptocurrency exchanges to share information with SARS. It is also not out of the question to expect SARS to join forces with other foreign banks, revenue services and cryptocurrency exchanges (with whom agreements are often already in place), to pool resources and share taxpayers’ trading and asset holding information across multiple jurisdictions. Taxpayers using the virtual currency should therefore ensure they keep records of all transactions and report any such activities to the relevant tax authorities when it comes time to do so, to avoid a battle with the revenue service.