As most of us know by now, cryptocurrency is not real but virtual money.
Any income received or accrued from cryptocurrencies are taxable because SARS sees cryptocurrencies as intangible assets. When declaring your cryptocurrency, the biggest question you need to ask if it is the nature of revenue or capital.
It is important to take note that SARS are improving their systems on a continuous basis and they will not hesitate to issue additional assessments to include cryptocurrency income once they find a way to retrieve information on cryptocurrency income. These assessments will also include penalties and interests.
There are 3 types of cryptocurrency transactions:
To determine the nature of your cryptocurrency income as follows:
Capital Gains |
||
Are you actively trading with cryptocurrency? |
Yes |
No |
Did you purchase the cryptocurrency as a long-term investment? |
No |
Yes |
Did you purchase the cryptocurrency more than 3 years ago? |
No |
Yes |
Gross Income |
Capital Gains |
|
Income: |
Income received from trading with cryptocurrency. |
Proceeds from selling the cryptocurrency. |
Deduct: |
All expenses that was incurred to produce the cryptocurrency income |
Base cost of the cryptocurrency. |
Profit: |
Included in your total taxable income that will be taxed as per normal tax tables. |
It will be added to the total of capital gains for the year less R40 000 annual exclusion and then 40% of the balance will be added to your taxable income that will be taxed as per normal tax tables. |
Loss: |
Loss will most likely be ring-fenced unless you can prove you are trading as a business. |
Will be set-off against other capital gains from other assets. |
The purchase price is determined on the date of the earlier of receipt and accrual. Cryptocurrency is not regarded as a share and therefore SARS does not treat it as the average for the year.
It is important to note that if you trade as an individual trade with cryptocurrency the loss on cryptocurrency may be ring-fenced and you will only be able to set it off against future cryptocurrency profits. This is because SARS sees cryptocurrency trading by an individual as a hobby unless proven otherwise. SARS also marked trading with cryptocurrency as a suspect trade unless you are able to proof differently.
How do you escape the suspect trade mark?
You will need to proof to SARS that you are trading as a business and not trading as a hobby. This would include all of the following factors:
Are there any VAT consequences?
No, there are no VAT consequences for cryptocurrency since it is seen as a financial instrument which is an exempt supply.
A quick example for you:
You sold your 1 Bitcoin for R145,000 on 20 February 2020.
Let’s look at three different purchase scenarios.
You purchased this Bitcoin on:
a. 3 May 2019 for the amount of R86,000
b. 13 August 2019 for the amount of R164,000
c. 7 January 2016 for the amount of R7,000
Answer:
a. This bitcoin sale will be seen for trading purposes due to the fact that it was sold within 12months of purchase.
= Income - Cost
= R145,000 – R86,000
= R59,000 profit that you will added to your total taxable income for the 2020 tax year.
b. This bitcoin sale will be seen for trading purposes due to the fact that it was sold within 12 months of purchase.
= Income - Cost
= R145,000 – R164,000
= R19,000 loss that will reduce your total taxable income for the 2020 tax year.
(Important to note that if you are not trading as a business, the assessed loss will be ‘ring-fenced’ and carried forward to be utilised against future crypto profits)
c. This will be assumed that you purchased it for investment purposes because you held the Bitcoin for more than 3 years.
= ((Proceeds - Base Cost) – Exemption) x 40%
= ((R145,000 – R7,000) – R 40,000) x 40%
= (R138,000 – R40,000) x 40%
= R98,000 x 40%
= R39 200 taxable capital gains that must be included in your total taxable income for the 2020 tax year