With the rise in popularity of cryptocurrencies, many people are asking the question whether the taxman can claim a piece of what’s in their crypto wallet? The good news is that if your approach is to ‘buy and hold’, you can put off paying tax until you are ready to cash in. However, there are still circumstances where you are liable to pay tax.
SARS is starting to audit cypto investors
While the rules around tax and cryptocurrency have been murky, and not helped by the fact that investing in crypto has been viewed as an act of rebellion against the existing financial order, investors need to note that SARS is starting to audit investors.
In the past the crypto market moved too fast for regulators to keep up with it. However, when cryptos are sold through recognised crypto service providers, they become visible to SARS and liable for taxation and SARS is now asking investors to provide proof of their transactions.
Paying tax on crypto
SARS considers cryptocurrencies to be “assets of an intangible nature” as opposed to currency or property. Income “received or accrued” from cryptocurrency falls under the definition of “gross income” according to the tax act. However, under certain circumstances, gains may also be considered capital under the Eighth Schedule to the tax act.
The rules around paying tax on trading crypto are as follows:
- If you are making profits from trading crypto, this is deemed as an income and is taxed at your marginal tax rate up to a maximum of 45%. Even if you switch one cryptocurrency for another, like Bitcoin for Ethereum, this will still be deemed a realised trading gain and you will be subject to income tax. Crypto investors must also be aware that due to the Common Reporting Standards, where tax authorities worldwide share information, any crypto trades offshore will be reported back to SARS
- If you buy and hold for a long period and then sell at a profit, then capital gains tax (CGT) comes into play. The CGT rate can range from 7.2% to 18% depending on your tax bracket.
For tax purposes, short term trading activity with the intention of earning daily wages is deemed income, while long term investments (usually over three years) are subject to capital gains taxes.
What if you spend your Cryptocurrency?
Another scenario that is still a murky area is if the cryptocurrency holder uses their cryptocurrency to make purchases. The 2018 SARS guidelines specify that “goods or services can be exchanged for cryptocurrencies. This transaction is regarded as a barter transaction. Therefore, the normal barter transaction rules apply” In other words, this crypto is taxed as income to be reported on the ITR12 form.
When is your crypto not taxed?
If your strategy is to buy and hold and you are merely holding cryptocurrency in your wallet at year end, this is not recognised as a taxable event. It only becomes a taxable event when you sell your cryptocurrency and realise a capital gain or a loss.
For expert assistance in dealing with your cryptocurrency tax, speak to our experienced tax team today.