A crypto asset is a digital representation of value that is not issued by a central bank and applies cryptography techniques in the underlying technology. It is traded, transferred and stored electronically for payment, investment and other forms of utility.
Taxpayers often misunderstand that tax on crypto assets is a new type of tax and incorrectly believe that they are only subject to tax once they withdraw from the exchange. The South African Revenue Service (“SARS”) made it clear that crypto assets are regarded as assets (as opposed to a currency) and are subject to taxation in line with the existing tax rules. The crypto asset FAQ guide issued by SARS states that normal tax will apply to specific transactions such as mining, remuneration and payments for goods or services. However, no further information is provided concerning other crypto asset transactions, such as airdrops, staking, hard forks, DeFi, swapping or sales.
Generally, exchanging, disposing or receiving crypto assets will give rise to a tax event. Whether this transaction is subject to income or capital gains tax will depend on the taxpayer’s intention supported by objective factors. There is no set and delineated rule to determine whether a receipt will be capital or revenue in nature. This requires a consideration of the existing legislative provisions and case law. However, it could, by and large, be said that where a scheme of profit-making has been undertaken, receipts arising from the transaction will be classified as revenue and subject to income tax. We recommend that taxpayers approach their tax advisors with their particular facts before adopting a tax position in this regard.
Sufficient documentation must also be retained to determine the income or capital gain of the taxpayer when filing their tax return. In the FAQ guide, SARS states that conventional receipts and/or invoices would provide proof of purchase and sale prices. It is, however, important that the documents retained are detailed and contain information such as:
- the type of crypto asset;
- date of the transaction;
- type of transaction (for example, received or disposed of);
- number of units;
- value of the transaction;
- total units of each crypto asset held at the beginning and end of the tax year;
- exchange records and bank statements; and
- wallet addresses.
The limited legislative guidance and constantly evolving crypto asset landscape may lead to further uncertainty regarding the tax treatment of specific crypto assets and transactions. We advise that any uncertainties be discussed with your tax experts.