I have started investing in crypto projects this tax year, and with some lucky choices have already made a decent profit. It’s not just appreciation of coins I’m holding but also being rewarded with new coins for having invested in projects. I assume because these are coins being ‘paid’ to me they are effectively income, so I will have to do provisional tax this year (in addition to the normal IRP5 as I still hold a salaried position)?
If so, this would be my first provisional tax submission. My main concern is having to provide an estimate of my total income in the first provisional tax submission. I believe my gains in the second half of the tax year will be fairly erratic, with some good fortune possibly eclipsing my gains from the first half. Is it safe to overestimate the first submission? If my final income is less estimation will I receive that extra paid tax back? Or is there any provision in the provisional tax rules for handling unestimable/unpredictable income?
Although I am not a tax practitioner it is my considered opinion that the appreciation of the coins will not be taxed unless you realise the gain. This should be treated as a capital gain in the tax year it was realised as opposed to income. The South African Revenue Service (Sars) can classify the gain as income if you are seen as a trader of coins. If it is your business to buy and sell coins for a profit and you are actively trading, then the gains will be treated as income.
With regards to the receipt of coins for having invested in projects, I would say even if erratic and difficult to estimate it is no different from receiving something like royalty fees. This in my view is income to you and Sars would tax it as such. It is important for you to differentiate between the receipt of coins which should be treated as income and the gains made on the sale of coins as capital gains (as long as you are not a trader).
Registering for provisional tax is fairly straightforward. Provisional taxpayers need to make two submissions in a tax year. The first is in August which is halfway through the year and the second is in February which is at the end of the tax year. Tax practitioners will agree that it is important to get the second submission as accurate as possible because you may be fined if your estimate in February is way below the income in your final return.
The first submission is important but is simply an estimate of where you think you will end up for the full tax year. You then divide the tax due by half and pay this to Sars before the end of August.
You then have the second submission due in February to make changes to your estimate and to pay the correct tax. As it is at the end of the tax year you will have a fairly good idea of the income you have earned for the year. If you had overpaid on your half-year estimate in August you have the ability to rectify this by simply reducing the full year estimate and pay no or less tax.
If you are due tax back for the full year this will be worked out and refunded to you through the filing of your annual return.
It is better to make sure you get the February estimate as close as possible so that no tax is due back to you as you will have to wait for a refund until tax season opens later in the year. I would encourage you to consult a tax practitioner if only for this tax year to make sure you are completing and disclosing gains and income correctly and on time.