The tax treatment of crypto asset transactions

The tax treatment of crypto asset transactions

• 14 July 2021
• Individuals Tax
• The Tax Faculty Tax Specialist

This article is based on tax law for the year ending 28 February 2021.

Author: Corlia Faurie

“It’s human nature to resist that which we don’t understand, or which we can’t control” – we as individual taxpayers do not always see eye to eye with tax compliance. Be this due to the attitude towards the tax system, or a lack of understanding of the tax laws, there are various tax matters that individuals question on a daily basis.

Among these are questions surrounding the tax treatment of crypto asset transactions which have increased significantly in the past year. This article aims to shed some light on how the individual should approach this matter.

Crypto assets

In recent years, crypto has emerged and evolved into a hype among many taxpayers. It could even be said that there is a “crypto community”, with individuals and corporate entities the world over that have high hopes for it.

To clarify: what exactly is crypto? Why is everyone so excited about it? And more importantly, why has it caught the attention of the SARS?

Crypto may be distinguished as a “currency”, or at least as an “asset” – it represents an item of value that exists purely in the digital space, thus being a virtual asset. It may be acquired by either “mining” for it (i.e. using sophisticated computers to solve algorithms), or buying it on a crypto exchange such as Binance, Luno or Coinbase.

While it is not accepted worldwide as legal tender, countries such as El Salvador have started to allow the use of crypto as an actual means of payment and recognised currency, while other countries are seemingly considering it. Having said that, there are individuals and entities that accept crypto as means of payment in private or employment transactions. This may be one of the main drivers of the value of crypto in the absence of it being commodity-backed – that is, the fact that there are parties willing to give and receive it in return for goods or services, or simply for other kinds of crypto, as it results in crypto representing a “store of value”.

The value of crypto has proven to be extremely volatile, especially the larger market players such as Bitcoin and Ethereum. This may be due to speculative interest in crypto, or simply due to the debate about the underlying value and usefulness thereof. However, since the “market” price of various cryptos have skyrocketed in the past, plenty taxpayers have swarmed toward it as an investment opportunity, or have joined the “crypto community” as enthusiastic miners.

Naturally, this could result in additional income for the taxpayer, which has not gone unnoticed by the SARS. As it stands, there are no special tax rules that cater purely for crypto transactions – this does not mean that it is not taxable at all. The SARS views crypto as an asset instead of a currency, and classifies it as a financial instrument. Consequently, all the general tax rules that apply to such assets will also apply to crypto transactions.

For most taxpayers, this will result in capital gains or losses provided the crypto is held as a capital asset. It remains the taxpayer’s responsibility to determine whether the asset is of a capital nature or not – this would require the taxpayer to consider the intent and frequency with which the crypto is purchased and sold. Should the transactions be revenue in nature (which is currently the case for those “mining” for crypto assets), the income and expenses related to it should be declared as an actual trade conducted by the taxpayer. It is important for individual taxpayers to remember that it is not necessary to also register a company, even if they are trading in crypto as “miners” or frequent traders. Individuals who conduct a trade, even if it is as a sole proprietor, may still apply the normal provisions from the Income Tax Act that relate to deductions and trading stock.

It is crucial that the taxpayer keep as many records as possible to substantiate (a) the claim that their crypto assets are capital in nature and/or (b) the costs incurred for acquiring such crypto, as the SARS may call upon it to confirm the nature of the asset itself and the costs it is accounted for at.

Individual taxpayers are advised to equip themselves with the knowledge necessary to account for these transactions correctly on their tax returns, to avoid finding themselves in a tight spot with the SARS afterwards.

Webinar Commentary

Further webinar commentary on crypto assets can be accessed here.

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