SARS intensifies focus on trading of crypto assets
The South African Revenue Service (SARS) has significantly escalated its efforts to enhance tax compliance in the crypto sector by issuing tax notices and clarifying exchange control regulations.
Normal income tax rules apply to crypto assets and affected taxpayers need to declare crypto assets’ gains or losses as part of their taxable income. The onus is on taxpayers to declare all crypto assets-related taxable income in the tax year in which it is received or accrued. Failure to do so could result in interest and penalties.
Following normal income tax rules, income received or accrued from crypto assets transactions can be taxed on revenue account under ‘gross income’. Alternatively, such gains may be regarded as capital in nature. Taxpayers are entitled to claim expenses associated with crypto assets accruals or receipts, provided such expenditure is incurred in the production of the taxpayer’s income and for purposes of trade.
SARS is reported to have been issuing notices to crypto traders to inform them that their tax affairs are under review. These notifications are based on information obtained from crypto asset exchanges. SARS is granted a wide range of collection powers under the Income Tax Act, including a requirement for third-party service providers to submit financial data.
SARS expanded its cryptocurrency audit capabilities in 2020, which included hiring specialists for crypto tracking. SARS emphasised its authority under tax legislation to enforce compliance. According to SARS’s guidelines, taxpayers could face severe penalties under Chapter 16 of the Tax Administration Act of 2011 if they misreport any cryptocurrency transactions.
The South African Reserve Bank (SARB) has also clarified its stance on crypto assets, particularly in respect of exchange control regulations.
According to the SARB, neither the Currency and Exchanges Manual for Authorised Dealers nor the Currency and Exchanges Manual for Authorised Dealers in foreign exchange with limited authority, allow for cross-border or foreign exchange transfers for the explicit purpose of purchasing crypto assets. From an exchange control perspective, the Financial Surveillance Department is unable to approve any transactions of this nature.
Individuals can purchase crypto assets from abroad using their single discretionary allowance of up to ZAR1 million and/or their individual foreign capital allowance of up to ZAR10 million with a Compliance Status (TCS) PIN per calendar year. A local Authorised Dealer will be able to assist individuals with these allowances and will use the TCS PIN to verify the taxpayer’s tax compliance status via SARS eFiling prior to effecting any transfers.
SARB said it should be noted that, when purchasing foreign exchange through an Authorised Dealer, a customer is required to sign a declaration, either physically or electronically, which includes the wording: “I have been informed of the limit applicable to the above transaction and confirm that this limit will not be exceeded as a result of the conclusion of this transaction”. It therefore follows that an individual is responsible for ensuring that he/she does not exceed the relative allowance applicable to the transaction.
An individual may not use another individual’s single discretionary allowance or foreign capital allowance through the granting of a ‘loan’ or any other similar agreement. This is regarded as a simulated transaction to circumvent the provisions of the Exchange Control Regulations and therefore an illegal activity.
The Exchange Control Regulations prohibit transactions where capital or the right to capital is, without permission from National Treasury, directly or indirectly exported from South Africa. This includes transactions where an individual purchases crypto assets in South Africa and uses them to externalise “any right to capital”. Contravening these regulations is a criminal offence.
The repatriation of value to South Africa through crypto assets is not permitted as part of an individual’s single discretionary allowance and/or foreign capital allowance. This is because of the nature of the assets and because the transaction is currently not reportable on the FinSurv Reporting System. Similarly, non-residents who have introduced crypto assets to South Africa for local sale will not be able to transfer the sale proceeds abroad. The applicable exchange control policy is outlined in section G.(C)(i) of the Currency and Exchanges Manual for Authorised Dealers.
