RING-FENCING CRYPTO LOSSES
Yet another grey area around crypto asset taxation has come to light. Investors are asking whether they can claim assessed crypto losses against other income. The answer, as with everything pertaining to crypto asset tax, is not that clear-cut.
Legal Manager, Cross-Border Taxation
The Part-Time Crypto Trader
Let’s assume for a moment you are a freelance writer who sells articles to online publications. You are trading your writing skills for money, which makes it trading income. You ask a fair rate and earn a modest living from this trade.
At the same time, you regularly attend dog shows with your pet. You spend a lot of time and money grooming your doggie for the shows, but you don’t always win the prize money. This means you often incur a loss. Let’s say for two years straight you had losses on the dog shows, but in the third year you won a bit of prize money.
As a third venture, you do a bit of crypto trading on the side. You’ve been at this for five years. In the first year, you hit it big with crypto and made a decent profit. In year two and three you incurred losses. In year four you make a bit of profit, but in year five you incur a serious loss again.
According to our current tax laws, you can claim your losses on the dog shows against the income from your writing trade. This effectively means that the amount you must pay tax on, gets reduced because of the losses incurred.
However, according to Section 20A of the Income Tax Act, your crypto losses will be ring-fenced. That means you cannot off-set the assessed crypto trade losses against your writing trade income. Because you made a loss on the crypto for three out of the last five years, you can only claim that loss in crypto trading against other crypto trading income. In other words, you can claim Bitcoin losses against Ethereum income. It has become ring-fenced.
There are exceptions, but this is where it really starts to get complicated. In certain instances, you can off-set losses against other income, but only if you meet very particular requirements stipulated in the Act, and provided that SARS, in exercising its discretion, accepts it. This becomes a non-option, however, if you have incurred losses for six out of ten tax years.
Jumping the Fence
The rules surrounding crypto taxation are incredibly complex. Because cryptocurrency is not only novel but also constantly evolving, it means that crypto asset tax is trapped in an ever-changing legal landscape, which confuses investors and regulators alike.
The hard reality is that cryptocurrency is still a digital asset. Questions only arise when you blur the lines between crypto and cash. While El Salvador has just become the first country to embrace Bitcoin as legal tender, it’s not yet seen as legal tender in South Africa.
To put it bluntly: tax is paid in South African Rand, not in crypto. At some point in each case, crypto will be realised for money or other assets. Be aware, there will always be tax consequences when this is the case.
Consulting a tax specialist firm, with a strong legal component and understanding of cryptocurrency, can save you from falling afoul of SARS or facing a surprise tax bill when doing your crypto tax calculations and filing submissions.