Tax implications of cryptocurrencies
REVENUE OR CAPITAL GAINS? CLARIFICATION EXPECTED SOON Taxpayers involved in this space could potentially face a significant bill.
As Bitcoin continues its roller-coaster ride, taxpayers need to brace themselves for heightened scrutiny of their declarations in relation to crypto-currency gains.
The South African Revenue Service (Sars) has confirmed that it will clarify its position on the tax treatment of cryptocurrencies soon, but its guide on cryptocurrencies is not expected to be published before the budget speech in February.
However, due to the intricate nature of cryptocurrencies like Bitcoin, the complexity of tax legislation and the wide-ranging views international tax authorities are taking on the matter, taxpayers may well find themselves at odds with Sars, even after more information is provided.
Despite its slide since midDecember, Bitcoin was still trading over 1 300% higher on local exchange Luno yesterday than it was four years ago. The past year in particular has seen substantial price gains and taxpayers involved in this space could potentially face a significant tax bill.
In light of the money that has been made in cryptocurrencies in recent times, Sars is likely to conduct detailed investigations over the next year or two.
Taxpayers who intentionally fail to declare their profits or gains, could face understatement penalties of up to 200% as well as interest, says Ruaan van Eeden, managing director for tax and exchange control at the Geneva Management Group.
In December, Sars indicated that it was in discussions with some of the top technology companies in the world to enable it to track cryptocurrency trades more effectively.
The fact that Sars hopes to provide guidance on the tax treatment of cryptocurrencies soon suggests that it plans to scrutinise this space much more carefully, adds Asheer Jaywant Ram, CA(SA) and senior lecturer in the School of Accountancy at the University of the Witwatersrand.
Sars is under pressure to ramp up its tax collection initiatives after the medium-term budget policy statement (MTBPS) showed that tax revenue was projected to fall almost R51 billion short of the 2017 budget estimate.
Efforts to implement free tertiary education and to stabilise struggling power utility Eskom will likely add pressure to the fiscus. Yet, it is not quite clear whether there is significant tax money hidden away in the crypto arena.
“I think there is enough interest and there is enough scope for Sars to be looking into this space, but now the question becomes – because Sars is really under pressure to reduce that deficit – are they really going to accept taxpayers declaring their gains as capital gains tax or are they going to just say it is all revenue in nature?” Ram asked.
If gains are considered income, taxpayers will generally be taxed at a higher rate.
Based on the facts of the matter, one person could argue that her gains are capital in nature, while Sars might contend that it is income. Where gains are capital in nature, capital gains tax would apply, but if it is considered income, the gains would be taxed at the taxpayer’s marginal income tax rate.
Due to the speculative and volatile nature of Bitcoin, it might be difficult for taxpayers to prove that it was a long-term investment and, therefore, capital in nature, and that the aim was not to profit off short-term volatility
In December, Sars indicated that it was in discussions with some of the top technology companies in the world to enable it to track cryptocurrency trades more effectively. Due to the speculative and volatile nature of Bitcoin, it might be difficult for taxpayers to prove that it was a longterm investment, and, therefore, capital in nature, and that the aim was not to profit off shortterm volatility.