SOUTH AFRICA ISSUES GUIDANCE ON CRYPTO ASSET TAX, BUT THE TAXMAN STRUGGLES
On 27 August 2021, SARS provided further guidance on the correct tax treatment of crypto assets and how this must be declared in their returns. This took place in the form of a webpage published by SARS, entitled “Crypto Assets & Tax”. The publication should perhaps be seen best in context of the various comments made by SARS recently on the taxation of crypto assets, the perceived non-compliance by crypto asset holders and how serious SARS is taking non-compliance.
Legal Manager, Cross-Border Taxation
SARS has created a special spot for declaring your held crypto assets
A common misconception is that where you have simply held crypto assets, but have not made any trades, you do not have to make any disclosure to SARS. The 2020/21 tax return requires that you must make a specific disclosure under the “Statement of Local Assets and Liabilities” section.
The consequence hereof is that all individuals who have acquired and held crypto assets during the tax year must disclose these holdings to SARS in their returns, regardless of whether any taxable events took place. This is easy to get wrong and taxpayers should be sure to tread carefully.
Where you do not make this disclosure, even negligently, this is now a criminal offense under the Tax Administration Act.
Confusion remains on Income Tax vs. Capital Gains Tax
In countries where income tax and capital gains tax are subject to the same rate, the nature of trading vs investment is not important. In South Africa, the top marginal personal income tax rate is 45% and top marginal capital gains tax rate is 18%; therefore a point of great significance.
In SARS’ CGT Guide (issued 5 November 2020), it was mentioned that “[g]iven their extreme volatility, Cryptocurrencies are likely to be held as a speculative asset of a revenue nature”. This is probably generally true, but not always the case.
Despite this, the webpage information published earlier this week only gives examples of capital gains tax disclosures. There are no examples given of income tax disclosure, which means taxpayers may fall on the wrong side of the law by just following the guidance provided by SARS.
SARS’ reference to existing jurisprudence
The new publication provides no specific examples or guidelines on how this differentiation between revenue and capital is to be made. The statement is made that the answer will come from existing jurisprudence. This does not mean much, if anything, to a normal individual taxpayer.
Despite popular belief, the determination of revenue vs capital is not merely a function of the length of time for which the asset is held – one must consider various factors including the taxpayer’s intention. Court judgments have confirmed that there is no single test to be applied.
For example, in ITC 1525 (1991) 54 SATC 209 (C), the taxpayer held Krugerrands for a period of 12 years (for a rainy day) and eventually sold them in order to inject capital into a new business – the Tax Court found that this was subject to tax on revenue account and not CGT. This was similarly the case in ITC 1526 (1991) 54 SATC 216 (T), where the Krugerrands were held for up to 9 years as a store of wealth and protection from inflation.
Importance of compliance
There is no legitimate way for crypto asset investors to remain “invisible” from a SARS perspective and, while many may still be in denial of this, SARS will keep on getting sharper. Even where you fail to disclose correctly now, the non-disclosure is permanent and will come back in a few years to catch-up with the taxpayer. SARS has appointed specialists to deal with crypto assets, yet the market has not seen any prosecutions in this area of tax.
One thing is absolutely for certain, however – it is no longer enough to hide in plain sight. Crypto asset holdings (not just gains and losses) must now be declared in your returns, and we will soon start seeing the wheels of justice turn quickly for those who are slow to the uptake.