Crypto Myth #1: I do not have to pay tax on my Crypto in South Africa
If you have ever been in a conversation revolving around crypto and taxes, you will always hear somebody mention “crypto is not taxable” or “nobody knows how to tax it”. Shockingly, this myth is still around; after all, crypto is older than a decade.
We want to bust this myth once and for all. Crypto assets are taxable!
We have had clarity since 6 April 2018 on how crypto-assets should be taxed. SARS, however, did throw all its eggs in one basket and mentioned it is an asset, and as we have all the rules surrounding assets, no new rules need to be added to date. We know that this is not how we would want it in an ideal world. As crypto and digital assets are much more complex and cannot only be put in one category. However, this is where case law plays a significant role in eliminating uncertainty; for example, there is currently a couple in the US pushing for a clearer policy on staking tax. Such cases will set a precedent in the future.
SARS’s main point that they made to clarify its stance on the tax treatment of cryptocurrencies on 6 April 2018 was the following:
- Cryptocurrency is not a currency but rather an intangible asset.
- The current tax framework is evident in the taxation of assets. Therefore, no further clarification in terms of an Interpretation Note is required.
- The same revenue vs capital gains considerations should be applied to other assets.
- Crypto mining will result in income and subsequently be taxed as an asset depending on intention (as per revenue vs capital gain rules)
- SARS will review the VAT treatment on cryptocurrency (this has since been clarified; crypto assets falls under financial instruments and is VAT exempt).
Crypto Myth #2: You only pay tax when you “cash-out”
You are only obligated to pay tax when you cash your crypto out for money (FIAT) is another top myth we have heard a few too many times. The knowledge gap shows us how authorities have failed to communicate clear guidelines to the public
When you are playing around with crypto or are an avid trader or maybe a miner, the fact of the matter is many different crypto type transactions creates tax obligation. Cashing out to fiat currency is definitely not the only time a tax obligation arises on the taxpayer.
For example, staking, airdrops, forks, and crypto to crypto trades are all taxable events where a taxable obligation arises on the taxpayer to declare his income.
Crypto Myth #3: Crypto is the same as FIAT currency
Globally it is the norm that crypto falls under the definition of an asset, not cash, and this is also the view the South African revenue service took.
However, to each rule, there is an exception; not all of the world sees crypto only as an asset. For example, El Salvador & Central African Republic have taken a stance and have declared Bitcoin as a legal tender. Meaning Bitcoin must be accepted if offered in payment of a debt in those parts of the world.
In South Africa, crypto-assets can fall between two categories, namely:
- Income, or
- Capital gains or losses
Income which will generate a taxable obligation will happen when you profit from staking, airdrops, forks and mining, to name a few.
Disposing of your crypto assets may trigger capital gains or losses based on several evaluating factors. However, purchasing crypto is not taxable but will be considered when working out your capital gains base cost.
Crypto Myth #4: Nobody can trace any of my blockchain transactions
Anonymity is key in the Decentralised finance (DeFi) world, but you need to remember that blockchain is a public ledger. Every transaction is verified, and this makes all the transactions public domain.
Because of the transparency, it would be very easy for the government to track and link these “anonymous” wallets to people. The main reason is that nearly all people’s transactional history is an on-ramp (starting point) via a KYC (know-your-customer). Exchanges are required to follow these KYC rules that regulatory authorities have implemented. In addition, most exchanges have already been requested to report their customer’s crypto activities to SARS.
We have a nagging suspicion that SARS is partnering with private firms to the like of Chainalysis, which connects real-world activities to blockchain transactions, and enables them to track your transactions.
Being one day subpoenaed as a trader/miner for your public addresses is a reality. You will be faced with a crossroads. Option one is handing over all your information, losing the benefit that comes with coming forward on your own, or deciding if you are willing to lie under oath and incriminate yourself further.
Crypto Myth #5: You only need to rely on software to resolve issues
Like in everyday life, the software does help, but the truth is the software does not cover every single scenario.
Presenting your digital assets and all the transactions is not always as straightforward as one would think, even if it is all theoretically stored on the blockchain; retrieving and presenting the data is a different story.
It depends on the chains, and if you are dealing with lessor-know chains or random multi-chains, the allocation and following of the transactions do get more complicated. That is why we at CountDeFi are here to help.
If your reporting is done incorrectly, it will lead to an inaccurate report and a highly inflated taxable amount. Leaving you in a less than ideal position, have a watch through our video where we explore five typical pitfalls to which anyone can fall victim.
Crypto Tax Software is not a data in report out solution. In many cases tax can be heavily inflated if the necessary manual intervention is not performed – and performed correctly! In order to do this you need to understand the different available crypto tax software solutions. In this video we explore 5 typical pitfalls that can inflate tax and cause low accuracy reports.
Crypto Myth #6: You only need to reconcile data on the tax year you are filing
It would have been a different ball game if this was the case, but unfortunately, it is not.
To get the correct base cost for your capital gains or losses and deductible transaction fees, we must import all your data to analyse it.
For example, suppose you started trading in 2016 and only declared taxes in 2022. In that case, all your transactions from all wallets should be organised and summarised to get the correct and accurate transactional data that will be used to calculate your taxes in the applicable tax year.
How can we help?
We are future-focused accountants who are passionate about Crypto, DeFi and going bankless. We deeply understand the blockchain, liquidity & staking protocols, ICOs / IDOs, NFT ecosystem and other DeFi nuances.
Partner with us for all on-chain tax and accounting.