You are currently viewing our desktop site, do you want to download our app instead?
Moneyweb Android App Moneyweb iOS App Moneyweb Mobile Web App

NEW SENS search and JSE share prices

More about the app

Basic tax principles will apply to cryptocurrencies

The taxability of the proceeds on the sale of cryptocurrency depends on the facts, and each matter will be decided on its own merits.
Any ‘fruit’ arising from a cryptocurrency, such as interest, or a rental, is taxable. Image: Supplied

There has been much hype around the taxation of cryptocurrencies and the need for the South African Revenue Service (Sars) to come out with a practice note.

The fact that National Treasury and Sars have not come out with any legislation to specifically address cryptocurrencies does not mean that any person trading in cryptocurrencies will escape taxation, or the onus of reporting the profit.

Moneyweb Insider INSIDERGOLD

Subscribe for full access to all our share and unit trust data tools, our award-winning articles, and support quality journalism in the process.

Choose an option:

R63 per month
R630 per year SAVE R126

You will be redirected to a checkout page.
To view all features and options, click here.

A monthly subscription is charged pro rata, based on the day of purchase. This is non-refundable and includes a R5 once-off sign-up fee.
A yearly subscription is refundable within 14 days of purchase and includes a 365-day membership.

Click here for more information.

Normal rules apply

A basic doctrine of the Income Tax Act is that the net amount (the taxable income) of the gross income received or accrued (excluding receipts or accruals of a capital nature) by any resident, in cash or otherwise, for any tax year, less any expenditure that is deductible for tax, less any specific exclusion, is taxable.

A non-resident will be taxed on any taxable income from a South African source, unless there is a specific exclusion.

A ‘capital gain’ is included in taxable income, at a different rate for individuals and companies, and is not a receipt or accrual of a capital nature.

Sars has the right to tax any profit, from any business venture, from the sale of any asset, tangible or intangible, provided it isn’t of a capital nature, and there isn’t a specific exclusion in the income tax act. Any undeclared taxable income will not prescribe.

In other words, Sars is not restricted by any time frame, and can go after any taxpayer for any undeclared income, many years later.

A cryptocurrency has a calculable value, which differs from time to time, unlike currency, which has a specific value. Cryptocurrency has been included in the definition of “financial instrument” in the act. This renders the issue, acquisition, collection, buying, selling or transfer of ownership to be exempt from value-added tax (Vat).

Capital profit versus revenue profit

The distinction between what is a capital profit, which is subject to capital gains tax, and what is a revenue profit, has been developed by case law. A loose distinction is that of whether a taxpayer is carrying on a trade, and whether the profit resulted from a scheme of profit-making.

The taxability of the proceeds on the sale of cryptocurrency depends on the facts, and each matter will be decided on its own merits.

The taxpayer should retain evidence of intention at the time of purchasing the cryptocurrency, and the reasons for selling.

Holding an asset, whether a share or bitcoin, for an extended period, will not necessarily absolve the taxpayer from taxation if such share or bitcoin was sold in a scheme of profit making.

Any ‘fruit’ arising from a cryptocurrency, such as interest, or a rental, will be taxable. Where a cryptocurrency morphs into a complex instrument, the basic tax doctrines will follow.

Any loss arising from the acquisition or disposal of any crypto asset will be ring-fenced in terms of the provisions of Section 20A of the act.

Sars’s stance

In a report dated April 6, 2018, Sars confirmed that it will apply normal income tax rules to cryptocurrencies.

Read:

Further, where a taxpayer has acquired a cryptocurrency through ‘mining’, this will be seen as trading stock until it is exchanged for cash or in a normal barter transaction, for example, exchanged for goods or services.

Sars will not require Vat registration as a vendor for purposes of the supply of cryptocurrencies.

Case law deciding whether profits are of a revenue or capital nature

Sale of Krugerrands

There has been some interesting case law involving Krugerrands.

Example 1: Krugerrands had been held for a long time as an investment by a family investment company. When the Krugerrands were sold to purchase shares, the court saw this as a switch from one asset to another, and held that the profits were not taxable.

Example 2: A taxpayer had held Krugerrands for over 10 years, but was forced to realise them to purchase a car. The taxpayer was able to demonstrate that his intention was not to make a profit. The court held that the proceeds were not taxable

Balance of probabilities

The South African courts had long held that a taxpayer had the onus of showing, on a balance of probabilities, that the proceeds were capital.

CSars [the Commissioner for the South African Revenue Service] v Capstone 556 is an important Supreme Court judgment that was handed down in 2016.

The court had to decide whether the proceeds of the sale of shares were revenue or a receipt of a capital nature.

The court referred to Samril Investments v CSars, wherein Acting-President of the Supreme Court Hefer “pointed out that profit-making is also an element of capital accumulation”.

The judgment quoted Hefer as having said that: “Every receipt or accrual arising from the sale of a capital asset and designedly sought for with a view to the making of a profit can therefore not be regarded as revenue.

“Each case must be decided on its own facts …”

The court found that the dominant purpose of the acquisition of shares constituted a long-term capital investment to rescue a distressed business, and that “Capstone proved on a balance of probabilities that the proceeds were of a capital nature”.

The big names in this incredibly complex and convoluted business rescue arrangement, which dated back to 2002 and involved Profurn and the JD Group, were Markus Jooste and Claus Daun, then major shareholders in Steinhoff.

For anyone interested in complex arrangements, I urge you to read the judgment. Sometimes, an arrangement is commercial, with or without tax benefits.

Listen to Ciaran Ryan’s interview with Wiehann Olivier and Tertius Troost from Mazars:

Please consider contributing as little as R20 in appreciation of our quality independent financial journalism.

AUTHOR PROFILE

COMMENTS   14

Sort by:
  • Oldest first
  • Newest first
  • Top voted

You must be signed in to comment.

SIGN IN SIGN UP

So: not only is cryptocurrency not a real currency, and not backed by anything, but you will also be taxed on any profits you make, should you be one of the lucky ones who aren’t fleeced by scammers and you do make some profit from this gambling and pure speculation.

Really attractive “investment”….

You take the gamble and risk with after tax money and might be in for a neat profit, or loss!

What a sickening thought, should you be lucky, to give more than a third to a Government knowing full well they’re going to eventually use it to dish out amongst themselves..A legal way of robbing you without any accountability..Taxpayers have to ascribe to the law, but the lawmakers have their own set of rules, and bank that they fleece

I’d rather have nothing than share one cent with this corrupt bunch.,

Had our cities and towns looked like a store from a fairy tale book, different story, but it’s more like a scene from a horror movie, with mayhem, destruction and theft as the main script

Little wonder the tax base is dwindlingo

@Incitatus

Oh, good lord, here we go again – the sheer ignorance on BTC is astounding, despite it being around for more than a decade now !.

Ok , in that case, what exactly is that printed toilet paper they call fiat ‘backed ‘ by then ????

Good luck with that one. Just like SARS are going to tax other SA citizens like Zuma and the Guptas who have probably transported ill gotten gains in gold to .Dubai and made crypto currency investments! If transactions are untraceable and SARs are relying on the honesty of taxpayers to report their crypto investments, they have a hope in hell of collecting tax revenues! If it looks like a thief, smells like a thief, it is a thief!

Crypto has on/off ramps into/out of Fiat; from there they are on the blockchain public ledger which is fully transparent & traceable, not that SARS has the ability to impliment tracking.

Best practise is to run it like a business, declare everything & pay taxes. Of course if you have effective & efficient estate planning via trusts, you should never ever be in a taxable position.

An extra “not” in this sentence?

“ A ‘capital gain’ is included in taxable income, at a different rate for individuals and companies, and is not a receipt or accrual of a capital nature.”

One other thing is: The Income Tax Act doesn’t regard cash as an asset, so what if you turned all your crypto into cash and the cash isn’t an asset by virtue?

Losses made on cryptocurrencies won’t be automatically ring-fenced in terms of Section 20A. Section 20A only applies if the taxable income (before cryptocurrency losses) of the tax payer puts him/her in the maximum marginal tax rate bracket.

Just topping up my popcorn while I Google how the ostrich feather era ended.

& Dutch Tulips…*nom* *nom*

The Dutch tulip mania didn’t really happen the way people think it did. Read Tulipmania: Money, Honor, and Knowledge in the Dutch Golden Age by Anne Goldgar

Not a problem in India as any crypto and related are being outlawed.

I would be very honest when it comes to tax. Especially now that new people are in charge of SARS and new brooms sweep clean.
I heard a story that SARS now look at what cars you drive and where you stay and what banks you use and then they see what earnings you declared on your tax forms and if that corresponds with the way you live.
And should you go to jail because you did not declare all your profits remember that add where a prisoner is sitting with a jar of Vaseline and declares: ‘We are waiting for you’.

Theory and Reality don’t always go hand in hand.

What is SARS doing in reality with Crypto gains? It seems as if SARS treats all profits as Capital Gains but don’t ever claim a loss as it won’t be allowed. This is what I was advised to do by the SARS consultant when I prepared my tax return for 2020;

“treat all gains as capital gains” but “don’t claim a capital loss, it won’t be carried over to future tax periods”

I made a quite a profit in 2020, but all my transactions, ad hoc purchases and one sale, were made in the same tax year. I duly followed the advice given, and guess what, treated as a capital gain. I still have to test the loss.

So, tax law and reality are are two different things. I did record the conversation and have a reference number for any future queries.

End of comments.

LATEST CURRENCIES  

USD / ZAR
GBP / ZAR
EUR / ZAR

Podcasts

INSIDER SUBSCRIPTIONS APP VIDEOS RADIO / LISTEN LIVE SHOP OFFERS WEBINARS NEWSLETTERS TRENDING PORTFOLIO TOOL CPD HUB

Follow us:

Search Articles: Advanced Search
Click a Company: