WHAT ARE THE TAX IMPLICATIONS FOR VICTIMS OF CRYPTO FRAUD?
The Mirror Trading International (MTI) scandal has been on the minds of many crypto investors during 2020. This scam attracted lots of attention in the crypto industry where as many as 260 000 members were reported with daily returns of 0.5%. The age of MTI was, however, short lived.
Legal Manager, Cross-Border Taxation
Since the collapse of MTI in December 2020, many questions were being raised on the potential recovery of the invested amounts or their losses (but none of them from a tax perspective).
Do I tell SARS about my crypto losses?
The South African Revenue Service (SARS) clearly stipulates that all South African residents that own crypto must disclose their crypto holdings to SARS, irrespective if you made a profit or a loss. This means that all the investors that participated in MTI, for example, must disclose their position to SARS.
Investors that lost their crypto can claim these losses incurred against future profits, but those who had withdrawn more than they invested will ultimately be liable for tax. The challenge that MTI investors face, at least where they lost out, is the evidence they need to prove this to SARS.
We would like to remind the public that failure to disclose any crypto holdings to SARS is a clear violation of the South African Tax Law and could face up to 200% of the value of the default. Two wrongs do not make a right, and neither SARS nor the law care about what is “fair” in relation to revenue collection.
Claiming a loss can be the most useful measure in obtaining a preferable tax rate in relation to crypto transactions (or a loss of crypto), but a sharp understanding of the laws applicable are always a prerequisite. SARS has started auditing crypto tax disclosures, and more so
Will SARS find me?
Simply put, you cannot choose whether to disclose your crypto profits / losses to SARS. If you decide that it is not SARS’ business, and they cannot find you, this is nothing less than a criminal offence. There is no statute of limitations for SARS audits – so you will always have to look over your shoulder. If you would have had a tax liability, then this makes you a tax evader.
Our practice has seen many taxpayers refuse to disclose their income or losses to SARS, and in which case we have had to refuse service. This is a criminal offence and those who are caught will be correctly penalised by SARS and prosecuted by the National Prosecuting Authority.
From 2022, it is confirmed that SARS is now actively auditing this area, getting sharper and increasing their pace. This is an encouraging development and trust that increased compliance will eventually lead to a smoother process for tax disclosure with more favourable treatment in future.
Approaching SARS, before SARS takes the first step or starts asking questions, gives a taxpayer what we call the “first-mover advantage”. Once SARS notifies you of an impending audit, you can only comply and / or face criminal sanction, there is no amnesty available at that stage.
Someone told me to leave it alone
A major issue in relation to crypto asset tax is the amount of bad advice from some who may have a strong opinion about how crypto assets must be taxed but absolutely no real expertise (i.e., armchair experts). For example, many are told that only capital gains tax (and not income tax) applies – or that no tax applies. This incorrect advice will land taxpayers in hot water from a SARS perspective and, if given by an advisor, constitutes negligence that should be reported to the various regulatory bodies under which they operate.
There is a time-honoured trend that many taxpayers will follow the advice of someone who gives pleasant-sounding answers, as no one likes a “downer”. To be clear, tax in South Africa is not concerned with convenience, nor is it concerned with the feelings of the taxpayer concerned. If things go wrong, SARS will not pursue the advisor – it is between SARS and the taxpayer.
When seeking advice on your obligations from a tax perspective, it is fundamental that one speaks to an advisor with a full understanding of crypto assets, how they operate and the transactions that take place, as well as the actual tax implications that follow.