Digital Assets – should I really consider investing in them?

The human race has come a very long way. On our journey there has been constant development and evolution. The reason we are the superior species on the planet is because we can adapt to change and continually evolve over the years.

Our economical foundation has also developed and evolved over the last couple of thousand years. Initially we bartered with each other exchanging shells, precious rocks and utility items like food and water. This later adapted to what we now call “money”. The coins and paper we are all familiar with. Fast forward to today and the vast majority of what we currently call money is really just digital registers of your bank balance. It is important to note that this registry of how much money you have is held with a centralized institution (like a bank), who is operating within the governing structures of the country within they operate.

Economists and investment professionals have dedicated their lives to ascertain what the best combination of traditional assets (equity, bonds, property and cash) needs to be, to deliver a specific outcome over a specific time period. We have lots of historical data to back test theories and investment management as a specialized field of study has grown dramatically.

But there is a paradigm shift happening right under our feet. You need to be acutely aware of the changing environment. Digital assets or crypto currencies have entered the arena. Initially they were dismissed as a fad or a phase and mostly ignored by the investment professionals.

However, adoption is happening around the world. We are still figuring out how it will be incorporated into our daily lives. Store-of-value, medium-of-exchange or one of the millions of other utilities DeFi offer can be argued as potential use cases. The jury is still out on how we will ultimately use crypto in our daily lives. But the media attention, adoption and very importantly, the big money, is increasing exponentially.

Governments and most big corporates around the world are having heated boardroom discussions on the impact crypto will have on their current business model. The clever ones are engaging and integrating. The dinosaurs are ignoring and dismissing it. Don’t be a dinosaur. You know what happened to them.

My focus and goal will be to help people with educational material and to assist them in engaging with this new world. Crypto will not take over the world tomorrow and as such there will be a gradual transition from the Traditional Finance (TradFi) to Decentralized Finance (DeFi). We’ll most likely have a combination of the two for many years as well.

I’ll be your Sherpa on your journey. I’ll lead the way. Highlight the path you need to stay on and show the pitfalls and dangers on the journey.

Welcome. And thank you.

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Why Retirement Annuities (RAs) should still play a key part in your investment portfolio

Lately I’ve seen numerous articles, had discussions with clients and came across various tweet storms where the humble RA has been slaughtered. The main arguments against them are : high fees, poor investment performance, inflexibility and regulatory restrictions.

I wanted to do an in-depth analysis of the value of the RA in a bigger investment portfolio, but it would be a futile exercise. There are just too many variables that could be easily manipulated to show a good or a bad scenario. Instead I’m going to focus on the bigger picture and the “why” at the end.

Before I start I need to put following into context. Unfortunately to this day, the vast majority of RAs are built on a legacy financial structure, with a legacy financial provider. This was an inefficient way of doing things and this led to a very high fee structure. Excessively high fees are unacceptable and by just looking at the EAC of the investment you will immediately be able to see where you stand. Your total EAC should be around 2% or less. Anything more is an indication that it is time to move those assets via a section 14 transfer to a more efficient provider.

The next important area is the performance of the funds you are invested into. You cannot achieve extraordinary returns will minimal volatility. Low risk funds = low returns. High risk funds = a chance of higher returns. Don’t confuse the two. But if your mandate is a higher allocation to risky assets then you would expect a higher return over the long term. Hence the performance may struggle over a year but over a 5 year period there should be superior returns.

There has been a big uptake in passive investing lately. Your return will then more closely be to what the market returns. If we factor into consideration that all investment managers have good and bad days, over the very long term going into a passive solution (index) is by far the smarter choice. Remember it comes at a fraction of the fee of an active solution.

Personally, I invest in the Sygnia Retirement Annuity fund and utilize the Sygnia Skeleton Balanced 70 fund. My internal rate of return (my actual return) for years have been floating around 12% and my total cost is 0.4% (which is already deducted from the 12%).

There is no reason why you can’t achieve a ~10% per year compound return on your RA. This now brings me to the actual reason why I still love RAs… the tax! The return above quoted is after tax because there is no tax in the fund. Plus your contributions to a max of R350,000 per annum is fully tax deductible. So you are able to put money into an investment and immediately receive a guaranteed return, pay no tax on your proceeds, have it locked away so you don’t make foolish decisions. This is not restrictive, but rather sound financial planning.

Yes, we know that tax will be due again later when you withdraw but by deferring your tax liability till when you have funds to pay it makes sense. In the interim if you generate 10% per year over a 40 year period you will have more than enough money to settle any amount of tax.

The tax refund that you get annually for SARS can also be used to fund other investments or your lifestyle. I’m happy to fight anyone on why an RA should form part of your portfolio – note however that there are various other assets that you should also include in your bigger portfolio. Happy to hear your feedback!

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Crypto 101 : Read this before you start

Investing in cryptocurrency is all the rage, with literally thousands of crypto products popping up on social media. People are often tempted to invest as crypto influencers promise instant wealth.

In South Africa, the Financial Sector Conduct Authority (FSCA) has issued a crypto health warning – crypto-related investments are not regulated by the FSCA or any other body in South Africa, and investors could easily lose all their money and have no chance of recovering it.

We investigate the crypto investment landscape, whether it’s possible to invest safely in cryptocurrencies, and which red flags one should watch out for.

What are crypto assets?

Crypto assets take the form of digital money, the value of which isn’t backed by any central bank or government. This means that their value largely depends on market sentiment – how buyers and sellers feel about it at any given time.

“Bitcoin – the crypto asset most of us know – is very volatile,” says Gustav Neethling, the director of WealthPro. “Bitcoin investors doubled their money in November last year, but over the past year, its price in rands has been down almost 2%. You can see massive price movements in a single day – up to 30%, for example – and this has led to people speculating on the currency.”

This doesn’t mean that cryptocurrencies don’t have potential for investors, however. “Cryptocurrencies are in their infancy, but I believe they’ll be deemed a fifth asset class in which to invest, alongside equities (shares in a company), property, government bonds and cash,” Neethling predicts. “They may even be regulated later this year, which will make them a safer choice for investors.”

Should I invest?

Neethling says that, because crypto assets are extremely volatile, it’s important to understand your risk profile before investing. “How happy – or unhappy – would you be with large swings in value? If you’re a fairly conservative investor, you shouldn’t allocate more than 5% of your total investable assets to crypto. More aggressive investors could consider allocating up to 25% of their funds to cryptos – but they should be comfortable with the fact that their returns could go down to zero overnight.”

There are online risk profile questionnaires that can help you to find out how much investment risk you’re happy to take on, says Neethling.

How can I invest?

If you are new to crypto assets, the safest way to invest it to use one of the three big centralised exchanges in South Africa – Revix, VALR or Luno. These platforms allow you to buy cryptos with rands, and they ‘hold’ your currency for you.

Investment options include up to 60 crypto assets, a “Top 10 Bundle” offered by Revix that allows you to invest in the ten largest cryptocurrencies, and an Inflation Shield Bundle (also offered by Revix), which holds both gold and Bitcoin.

Neethling says the best way of approaching crypto assets is to follow a ‘dollar-cost averaging’ strategy, which means continually putting small amounts of money into your investment, like a fixed rand amount every month. “This helps to reduce volatility and is safer than investing a lump sum in crypto assets,” he explains.

How can I avoid crypto scams? 

“Currently, there is no legislative oversight of crypto assets, which adds to the risk – but the best weapon you have is education,” Neethling says. “Stick with one of the top three centralised exchanges as they’re equipped to safeguard your funds. Also, look out for the word “guaranteed” in promotional material. It’s impossible to guarantee any type of return, and it’s also impossible to guarantee that there will be no negative trading days. Be suspicious of claims that really do sound too good to be true.”

Neethling says a lot of scams use multi-level marketing strategies that reward investors for getting their friends to invest with them. “This means there’s a Ponzi scheme in the making,” he warns.

Farzam Ehsani, CEO of VALR, warns that scammers are targeting older people on platforms like Facebook as they build trust easily, and seniors want to stretch their pensions further. “If an older relative starts talking about crypto, ask them to show you what they’re doing,” Ehsani says. “Scammers will often build relationships with potential victims for months before persuading them to deposit money in an account on a crypto exchange.”

Other scams include crypto exchanges offering loans to obtain your ID number, proof of address and bank details; debit order scams, where scammers will use a victim’s details without permission to set up a debit order claiming to be from a crypto exchange; and third-party deposits where people offer to trade for you but require a deposit into their account.

“The most common scam sees con artists setting up fake crypto groups that provide ‘evidence’ of people receiving cash withdrawals. If you’ve joined a crypto group via Facebook, WhatsApp or Telegram but can’t post on the group, it’s fake, so don’t DM the owner of the group to ask how to invest,” warns Ehsani.

Tips for investors

The FSCA offers the following investment tips:

  • If you really want to invest in crypto assets, invest small amounts of money you can afford to lose. Never borrow money to invest.
  • Don’t invest on your own – work with a financial services provider registered with the FSCA (check the website here).
  • Read the FSCA’s publications on digital currency, which can be found here.

Published by Fiona Zerbst for JustMoney 

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Taxation of crypto assets in South Africa

A tectonic shift is occurring right now, though it is happening slowly. Only a few people can see it at the moment. I’m talking about the total overhaul and reformation of a new global financial ecosystem.

The old system is dominated by a small group of powerful people who are connected to powerful organisations, such as politicians and the uber-wealthy. Central banks and big corporates dictate what happens with “retail” or normal people like you and me.

Transitioning to a more equitable distribution and open economy will not happen overnight and will be met with resistance from those currently benefiting from the current system.

A crucial element is how income will be divided between users and governments.

Governments need taxation to fund different projects, and this is not likely to be altered. Nevertheless, it is my opinion that the process of electing governments and the decisions they make will also shift over time.

The crypto market is still relatively young and regulators worldwide are still trying to figure out how to best regulate it. Below is the current view from SARS on how the taxation of crypto currencies (they prefer to use the term crypto assets) will be taxed. The landscape is moving quickly, so please be sure to confirm the information below before proceeding.

Because tax and subsequent legislation is always very technical, I’ll try to explain it in as basic as possible terms. Understand that although we have legislation, the interpretation of the wording is always up for debate. This means anyone can approach a court to verify their interpretation.

Let us start by diving right in. SARS has decided that crypto currencies are not a currency, but instead are digital assets because they are intangible. Crypto assets could potentially provide a very nice income stream and as such they will want to tax it. The big question is whether it should be taxed as revenue or income (potentially maximum of 45%) or as a capital gain (potentially maximum of only 18%). Luckily VAT is currently under review but unlikely that VAT will play a role going forward.

There is big difference between the two approaches. Currently SARS is leaning towards the first (taxed as an income) viewpoint. Why? They say it is highly speculative (correct), people partake in short term trading (correct but not always). You’ll thus need to motivate to SARS why it is NOT revenue in nature.

As such SARS currently views all six of the potential taxable events below as taxable and taxable as revenue (potentially 45% but keep in mind that you are allowed to deduct allowable expenses from the income) :

  • Selling crypto for fiat (buy BTC and then sell it again later for ZAR)
  • Selling crypto for another crypto (buy BTC and then sell it for ETH)
  • Receiving crypto for mining or staking
  • Receiving crypto for services rendered (you work for XYZ Pty and they pay you in BTC)
  • Receiving airdrops from new projects (you are part of a community and receive ABC token due to your engagement in the community/project/protocol)
  • Receiving crypto for yield farming (you borrow your crypto to a platform for yield, you provide liquidity etc)

As is evident, nearly every transaction is taxable. It is yet to be determined how the verification of very complex transactions will be carried out. Just thinking of Decentralized Finance (DeFi) must send shivers down the spine of regulators. Centralized Exchanges (CEXs) will likely be targeted by regulators, who will then force them to register and disclose this information.

Couple of closing aspects to consider :

  • Most of the crypto transactions takes place offshore or in other currencies than ZAR. As per SARS guidelines you can either convert at spot rate to ZAR on the date/time of the transaction or use the average exchange rate over the year of assessment.
  • Although most of the transaction will fall in the revenue/income approach if you are adamant or feeling lucky and will use the capital gains approach you must use the FIFO (first in first out) in determining your base cost.
    1. You buy 1 BTC in 2020 for R100,000
    2. You buy 1 BTC in 2021 for R700,000
    3. You sell 1 BTC in 2022 for R500,000
  • Revenue/Income approach : Revenue of R500,000 less allowable deductions (assume R50,000) = R450,000 taxable income X 45% margin tax (assumed) = R202,500 (yikes!)
  • Capital gain approach : Capital Gain of R500,000 less base cost (R100,000 because of FIFO) = R400,000 capital gain X 18% margin tax (assumed) = R72,000 (still yikes!)
  • Poor timing can lead to big losses. This area is still open for interpretation but its advised to ringfence all your crypto losses meaning that losses from crypto from previous years of assessment can be carried forward but only be offset against future crypto gains.
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