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Cryptocurrency tax principles for South Africans

SARS applies the normal income tax rules when it comes to Cryptocurrencies, in fact, the term Cryptocurrency is not even defined in the Income Tax Act.

So, if you have bought and sold Cryptocurrency in the recent past what does that mean for you as far as your tax is concerned?

Here is a short summary:

1. The tax treatment of crypto assets would essentially depend on whether you are seen as trading in Cryptocurrency or whether you are holding it as an investment;
2. If you are seen as a trader (i.e. you buy and sell on a regular basis) then your Crypto assets could be considered by SARS as trading stock and you would be taxed on any profits or losses at the tax year-end. This is very important. The profit could essentially be an unrealised profit. I.e. if you are seen by SARS as a trader you are NOT only taxed on profits or losses when you convert the Crypto asset to Fiat currency but simply when the tax year rolls over….
   1. Important note – this could be quite devastating if you made a large profit at the end of the February year-end on your Crypto holdings, but then the Crypto asset value tanked two months later! A very, very possible scenario given how volatile Crypto assets have been in the last couple of months;
   2. To make things even worse, any losses on your Crypto asset portfolio are ring-fenced, and cannot be deducted from your other taxable income, unless you can meet certain criteria.
3. If you are not seen as a trader, then it is less problematic.
   1. You are only taxed when you sell the Cryptocurrency, i.e. convert it to Fiat currency;
   2. Because it is seen as an investment, the resulting gain is taxed as a Capital gain and any gain in excess of R40,000 (the annual CGT exclusion) is taxed at a maximum marginal tax rate of 18%

As can be seen from the above summary, there are a couple of important pitfalls to be aware of when it comes to your Crypto asset portfolio.

If you would like to chat further about the tax principles vis-à-vis Crypto assets then contact us at hello@118accounting.co.za to find out more.