It’s been known for some time that SA Revenue Services (Sars) was going to zero in on cryptocurrencies.
Cryptos have been allowed to operate in a sort of no-man’s land when it comes to regulation and tax. They remain unregulated, though that is likely to change later this year when crypto exchanges are declared financial service providers under the Financial Advisory and Intermediary Services (Fais) Act.
Tax practitioners are also poorly equipped to advise on crypto transactions, which can take many forms. It is not always clear what triggers a tax event.
This week, the three major crypto exchanges – Luno, AltcoinTrader and VALR – issued a joint statement saying they had been approached by Sars to disclose certain customer information.
The supposed purpose of the collecting the information was risk analysis, “which will inform the need for future action with respect to crypto assets,” according to a joint statement released by the three exchanges this week.
All three exchanges say they consulted with senior legal counsel and then decided to provide Sars with the information it requested.
Not everyone is playing ball, however. Stratum, a crypto company that does not even want to know th name of its customers, say it will definitely not supply any customer information to Sars.
“We purposely structured our international operations in anticipation that this day might arrive. We are an entire crypto-to-crypto organisation, set up to ensure we do not hold sensitive information such as bank account details of our clients, in keeping with the highest global standards of privacy of information,” says Stratum founder, Rocelo Lopes.
Tertius Troost, a crypto specialist at Mazars, says Sars has indicated it will apply “normal income tax rules” to cryptocurrencies when assessing whether a gain is revenue or capital in nature and that crypto assets are not seen as currency for income tax purposes.
The problem is, “normal rules” become increasingly complicated as the crypto market develops.
There are different ways crypto investing and trading can trigger tax events: arbitrage (making profits from price differences in crypto assets such as bitcoin and ethereum on different exchanges); investing in crypto “bundles” (like unit trusts, that are re-balanced monthly or quarterly); collateralised lending (using Ethereum as collateral to borrow on decentralised platforms such as Uniswap); ‘staking’ (earning interest on cryptos) and mining (using computers to solve complex problems and getting rewarded in cryptocurrencies).
It’s clear from the above that there are layers of complexity that have been added to what was once a fairly simple chain of transactions.
Troost suggests Sars together with National Treasury declares that gains (and losses) on crypto assets are deemed to be capital in nature if held for a period of, say, more than one year (similar to Section 9C of the Income Tax Act, which provides equity shares to be deemed to be capital in nature after three years).
“In this way, Sars can assist taxpayers in obtaining certainty in their disclosures. It will also assist in bringing taxpayers to Sars, instead of Sars needing to try and find non-compliant taxpayers in a space it is ill-equipped to conquer.”
Adds Thomas Lobban, legal manager at Tax Consulting SA: It is well worth remembering that tax is not only levied upon withdrawal of fiat from an exchange. In other words, sales of crypto into fiat, or swapping one crypto for another or even for stablecoins, are taxable events and cannot simply be ignored because funds have not been withdrawn from an exchange. We now know that it would be foolish to assume Sars does not know about these events. Sars is empowered to investigate taxpayer information, obtained from a third party where necessary, and cryptocurrency exchanges are subject to the same laws in South Africa as everyone else. It must therefore be properly considered whether it is legitimate for Sars to request information from crypto exchanges about their clients.”
All this is now becoming extremely relevant to tax practitioners who are going to have to come up to speed on cryptos, the types of transactions involved and whether these transactions create a capital gain or income tax event.