What Are Cryptocurrencies? - Crypto Tax Consulting


Over the last couple of years, cryptocurrencies (or, more accurately, crypto assets) have taken centre stage for many hopeful investors. However, uncertainty remains about what exactly crypto assets are and how investors should be taxed. 

For the purposes of understanding crypto asset taxation, it is appropriate to turn to the local revenue authority for a clear definition of cryptocurrencies. On their website, the South African Revenue Service (“SARS”) describes it in the following way: 

“A crypto asset is a digital representation of value that is not issued by a central bank, but is traded, transferred and stored electronically by natural and legal persons for the purpose of payment, investment and other forms of utility, and applies cryptography techniques in the underlying technology.” 

Based on the above description, crypto is a digital value system stored as a collection of binary data, which can be used as a medium of exchange. Ownership of these digital values (coin ownership) are kept in a virtual distributed digital ledger, often in the form of blockchain technology. 

Think of a blockchain as a large digital database containing a timestamped list of recorded transactions, such as the transfer of coin ownership. Whenever a transaction is completed, new data is entered into the database. This is recorded in a new block, then attached to older blocks of data, which forms a ‘chain of blocks’ filled with transaction data. These transactions are kept secure through cryptographic systems that use encryption to authenticate and protect each transaction. 

Why are cryptocurrencies called crypto assets? 
Within the regulatory framework of South African taxation, it was decided that the word should be changed from cryptocurrency to crypto assets. This enabled SARS, all relevant stakeholders, as well as those operating in the finance industry, to use a uniform description when referencing crypto-based investments. 

The cons of crypto: 
There are many pros to investing in cryptocurrencies. For one, the freedom to have a means of transacting in multiple jurisdictions at any given moment is a major benefit for expatriates or remote workers who love to travel. Being wholly digital in essence and not minted by a central banking system, also makes it one of the fastest modes of payment available. 

However, pros aside, there are a couple of important points to be mindful of if you are looking at entering the crypto maze. 

Unregulated – Crypto assets are relatively new and is therefore not properly regulated yet. Governments the world over are still trying to come to terms with the introduction of a decentralised currency, let alone finding ways to properly regulate and tax it, or to protect crypto investors from cyber criminals. 

Uninformed – The biggest drawback of crypto is that investors are often uninformed about how it works or how to protect themselves from the risks or the dangers of investing in crypto. The lack of regulation mentioned above, means that investors are obligated to do their own research before investing in a particular crypto asset. Digital criminals can prey on uninformed investors. 

Irreversible – Once a transaction has been concluded and filed into the digital ledger, it is practically impossible to reverse. For novice traders in the crypto space who do not have an appetite for risk, this can be a determining factor to whether they should dabble with crypto. 

Do I pay tax on crypto? 
It is a common misconception that crypto assets are not subject to taxation. This is obviously incorrect. Crypto is subject to the normal income tax rules, which means that taxpayers are required by law to declare assets’ gains and losses for each income tax year. SARS is within their rights to request a financial audit, should they suspect a taxpayer of not declaring their crypto assets-related income. The onus ultimately rests on the individual to prove that they have remained compliant with SARS’ guidelines pertaining to crypto taxation. 

The problem to note here, is that SARS has no statute of limitations. Once they sniff irregular activity in a taxpayer’s finances, they can start working their way back and call up backdated taxes that are due to them. These outstanding debts will then be subject to interest and penalties. 

Getting your crypto tax affairs in order can quickly become an expensive exercise. For this reason, it is advisable to work with a crypto asset tax specialist who stays abreast of legislative changes. 

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