Over the last year, many South Africans have been caught up in the bitcoin frenzy. Some made millions with cryptocurrencies, while others lost so much – it hurt.
Fact is – there were many early birds who caught the biggest worms. And boy, it was one hell of a winning streak.
It was going so well, that we nearly forgot to ask the question: “What, uh… What about tax…?”
The floor was open for speculation until finally, the taxman released a statement in April: Yes, South Africans will be taxed on all earnings from cryptocurrencies. However, no new interpretation note was put to the table. SARS merely explained that existing regulations should provide tax payers with more than enough guidance on how they will be taxed.
“You could benefit from declaring cryptocurrency transactions.”
Perhaps this is why many tax payers are still in some state of denial. Nonetheless, with the tax season now officially open, it’s time to get on top of things. You need to understand how you will be taxed on cryptocurrency winnings to avoid harsh interest and penalties. Good news is – you could benefit should you declare cryptocurrency losses.
Fair Warning: SARS is Gettin’ Their Tech On
There are a couple of significant indicators that urge us to believe that cryptocurrency transactions might be regulated in the future. SARS partnered with the South African Reserve Bank (SARB) to investigate ways of tracing inflows and outflows of money. The SARB also established a FinTech unit to review its position on private cryptocurrencies and develop a regulatory framework. In addition to this, the SARB rolled out its first experiment with block-chain technology last month. Introducing – Project Khokha.
Once regulated, we have no doubt that SARS will happily come back to the 2018 year of assessment to collect their piece of the pie.
Understanding the Different Types of Cryptocurrency Transactions
SARS confirmed that it sees cryptocurrencies as intangible assets. Any income received or accrued from cryptocurrencies are taxable. The income can either be of a revenue or capital nature and we’ll explain the implications later. Firstly, it’s important to take note of the following types of cryptocurrency transactions:
1. The Process of Mining
A cryptocurrency is acquired through the process of mining. The process of mining is best left to experts with advanced computer knowledge, high-performing mining hardware and a lot of moola.
2. Using Cryptocurrency to Buy Goods and Services:
An example includes Takealot.com, which accepts bitcoin as a method of payment.
3. Trading with Cryptocurrencies:
Most tax payers fall into this category. You can either buy cryptocurrency for the purpose of trading, or for a long term investment. Any income from these transactions is included in your gross income or treated as a capital gain respectively. Capital gain is however taxed at a much better rate, but will be tougher to prove.
Determine the nature of your income as follows:
| Ask Yourself | Gross Income: | Capital Gain: |
| Did you acquire cryptocurrency with the intention to actively trade with it? | Yes | No |
| Was the cryptocurrency acquired as a long-term investment? | No | Yes |
| Did you keep the cryptocurrency for a few years (generally 3 years)? | No | Yes |
How to Declare Cryptocurrency Transactions on Your Tax Return
In both of the above cases, it’s possible to declare cryptocurrency losses to SARS and receive the tax benefit. When preparing your tax return, make sure you tick the correct boxes to generate the applicable section of your tax return:
| Gross Income | Capital Gain |
| Included: Income received from trading with cryptocurrency. | Included: Proceeds from selling cryptocurrency. |
| Deduct: All expenses associated with the above income. Example: Cost of sales and subscription fees. | Deduct: Base cost of cryptocurrency. Example: Purchase price and broker fees. |
| Profit: Taxed according to normal tax tables, depending on your tax bracket. | Gain: Exclude R40,000 of the gain and include 40% of the remainder in your taxable income. |
| Loss: Set-off against other trading income. Tip: Check if any ring-fencing principles apply. | Loss: Utilise the capital loss against other capital gains from other assets. |
Perhaps you’re still considering dipping a toe into the volatile waters of cryptocurrencies. If you understand the tax implications thereof, it’s possible to plan ahead and enjoy the advantage. It’s taking control and another step forward in earning your financial freedom.