Those who thought they could bank their crypto profits without SARS noticing, are in for a surprise. Crypto assets may be gaining a firmer foothold in the market, increasing opportunities for diversification and growth, but it is important to remember that normal tax rules apply to gains and losses.
Anyone taking the leap into the virtual currency world, should keep in mind that non-capital amounts are subject to tax at a higher effective rate than capital profits. In the case of natural persons, the maximum effective rate for capital gains is 18% (compared to 45% on revenue gains); companies are taxed at 22.4% (compared to 28%) and trusts at 36% (compared to 45%).
What if I change my intention?
So a taxpayer would undoubtfully want their crypto profits classified as capital. The million dollar question is how to convince SARS this is indeed the case.
A taxpayer’s intention, both at the stage of purchase and disposal is the most important factor. However, many people acquire cryptocurrencies with mixed intentions (bought partly to sell at a profit and partly to hold as an investment) or they even change their rationale for the purchase later on. The dominant or main purpose is paramount and evidence relating to intention must be tested against the circumstances of each case, which include the frequency of transactions, method of funding and reasons for selling.
I lost my job and had to sell my cryptos – what now?
COVID-19 and the undesired consequences such as job-losses is an example of intention changing – you needed to sell to fill the hole in your pocket you simply never expected, or could have prepared for!
Where cryptos have been purchased and sold as part of a scheme for profit-making, however, there is no question that gains will be regarded as revenue in nature. An occasional sale of crypto yielding a profit suggests that a person is not a trader engaged in a scheme of profit-making. The “slightest contemplation of a profitable resale” is also not necessarily determinative, but cryptocurrencies sold for a profit very soon after the acquisition is an indication of the potential revenue nature of those profits. However, that measure loses a great deal of its importance when there has been some intervening act, for example a forced sale of the cryptocurrency assets in the example above.
Whether COVID-19 can constitute such a forced sale, will have to be individually evaluated with reference to each taxpayer’s purpose and their circumstances.
How to prevent negative tax outcomes
Yes, dear taxpayer it is entirely possible for you to hold and sell your cryptos, with some people recently making a tidy profit. However, you will need to prove these profits were not revenue in your hands. It is easier said than done, which is why cryptos remain something of an enigma for many investors, as well as a potential tax burden for those banking on fast profits.