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.
- You buy 1 BTC in 2020 for R100,000
- You buy 1 BTC in 2021 for R700,000
- 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.