Taxing crypto assets 45% in South Africa – what you need to know
According to legal experts at Webber Wentzel, the South African Revenue Service (SARS) is tightening the collection of taxes on cryptocurrency transactions, which makes it important to distinguish between the events that will trigger the income tax rates. or capital gains tax rates.
“The South African Revenue Service (SARS) increasingly audits crypto holdings and taxpayer business activities,” the company said. “He also requested information from some South African crypto exchanges, including Luno, about users of the platform and their transactions.”
Webber Wentzel said crypto is defined as a “financial instrument” in the Income Tax Act, as opposed to “money” which would have excluded crypto gains from the scope of the income tax. capital gains (CGT).
This means that the taxpayer’s intention, supported by objective factors such as length of ownership and frequency of transactions, would determine whether the crypto gains are income, taxed at a maximum of 45%, or capital of a taxable nature. maximum. by 18%.
The disposal of crypto as a financial instrument is a taxable event.
However, it can be difficult for taxpayers to prove that their crypto investment gains fall under the CGT net, as there are no deemed capital rules in the Income Tax Act for the crypto, Webber Wentzel said.
To determine the intent of the surrender, SARS may be guided by cases involving the surrender of Krugerrands, the company said.
In one case, the taxpayer has held Krugerrands for 12 years and the purchase was made with the intention of providing funds for a rainy day. The Krugerrands were sold to inject capital into a new business.
In another case, the taxpayer held Krugerrands from eight months to nine years. They were bought to provide a reserve of wealth for the taxpayer’s children and protection against inflation. They were sold for a variety of reasons, including making improvements and buying properties.
“The Tax Court ruled in both of these cases that the Krugerrands were held for income and subject to income tax rates,” said Webber Wentzel.
“So it may be convenient to use different wallets to trade crypto and hold crypto for long term gains.”
“The payoff when one crypto (A) is traded for another (B) is the difference between the market value of B and the cost of acquiring A,” said Webber Wentzel.
“If A was held or acquired as income, the difference will be taxed as income (45%). Otherwise, in the event of capital ownership, the difference will be subject to CGT (18%).
Since it can be difficult to determine the market value and cost of acquiring crypto in rand, Webber Wentzel suggests using the spot rate for transactions.
Rates and transaction schedules should be compiled on the calculated gains or losses on the tax return, he said.
“The same principles would apply when the taxpayer has purchased goods or services with crypto.
“The difference between the market value of the goods or services and the cost of acquiring the crypto would be subject to income tax (45%) or CGT (18%), depending on whether the crypto was held on the income or capital account.
Staking / mining / forks / airdrops
If a taxpayer were to derive crypto from mining or forking, then the gains would be subject to income tax (45%), as they arise from conducting a transaction.
If the taxpayer’s intention was to hold the crypto as a long-term investment, then he will be subject to CGT (18%) on any gain.
Stake rewards are also taxed at the income tax rate and, at this time, are unlikely to meet the definition of “interest” in the Income Tax Act.
This means that the annual interest exemption for individuals cannot be offset by wagering rewards, Webber Wentzel said.
“Additional complexities arise when staking rewards are sold. For example, suppose a taxpayer received wagering rewards with a market value of 80 at the time of receipt.
“This 80 would be subject to income tax because it is akin to interest (without the annual interest exemption).
“Then suppose the staking award is sold for 450 after five years. The difference between 450 and 80 is the capital gain on the sale. This capital gain can be taxed at the CGT rate (18%), and not at the income tax rate (45%), again depending on the intention of the taxpayer made available.
If the taxpayer receives new cryptos through drops on existing crypto held, this is akin to a distribution of new financial instruments based on existing financial instruments held.
Once again, the taxpayer’s intention to own the existing crypto, the frequency of transactions, the length of time they were held, would be taken into account in determining whether the new jettisoned crypto would be held in the income or capital account, a said Webber Wentzel.
“If held on the income account, the market value of the new air-dropped crypto would be subject to income tax (45%), and if on the capital account, CGT (18%) .
“It doesn’t matter that the value of the parachuted crypto was not converted into rand. Income is subject to tax when received or accrued, and there is accumulation when there is an unconditional entitlement to crypto / income.
- Commentary by Joon Chong and Lumen Moolman of the Webber Wentzel law firm.
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