Cryptocurrency Income: Yes, you should be declaring it on your tax return!




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 have been granted strong collection powers to request information from multiple third parties that falls within the terms of the Income Tax Act. This means that even though they do not have direct information to your crypto dealings, they still can come to the conclusion that you have earned other income which may be crypto income.

SARS will issue an additional assessment to include cryptocurrency if they come to a conclusion that you earned crypto income. These assessments may also include penalties and interest. If the declaration is wrong, you are able to dispute it but the onus is on you to prove to SARS the true reflection of your income earned with the applicable supporting documents.

There are 3 types of cryptocurrency transactions:

  1. The Process of Mining
  2. Purchase of Goods and Services with Cryptocurrency
  3. The Trading of Cryptocurrencies (Including purchase for trading & long term investment)

To determine the nature of your cryptocurrency income as follows:

 

                                  

Normal Income

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

The above table is a very broad way to determine the nature of cryptocurrency income. Each case must be reviewed individually to determine if the gain/profit should be  classified as normal income or capital gains for tax purposes.


SARS provides little guidance on how you will be taxed if you mine your cryptocurrency. The assumption is that the crypto earned through mining will automatically be seen as trading and then if it is sold/traded you will also need to declare the income which could be taxed as normal income or capital gains depending on the situation. Hopefully there will be more clarification on this soon.

                                  

Normal Income

Capital Gains 

Income:                                         

Income received from trading with cryptocurrency.

Proceeds from selling the cryptocurrency.

Deduct:                               

All expenses that were 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 youare actively trading 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 considers cryptocurrency trading as 'suspect' trades which may be perceived as 'hobbies', unless it can be proven otherwise.

For more details about 'ring-fencing' please read our blog here.

How do you escape the suspect trade mark?

You will need to prove to SARS that you are trading as a business and not trading as a hobby. This would include all of the following factors:

  • Your cryptocurrency expenses should be in proportion to your gross cryptocurrency income. i.e  you will be seen as a high risk/'suspect' trade if your cryptocurrency expenses are a large total whilst you only received a little gross cryptocurrency income.
  • You should be able to show how and where you have advertised and sold your cryptocurrency.
  • You should be trading in a commercial manner. Factors to be considered includes:
    • Number of full time employees, excluding employees providing services of a domestic or private nature (for example domestic servants and residential gardeners)
    • Trading from a commercial property and the business-like nature of its appearance
    • The extent of the use of equipment used exclusively for the trade
    • The time you spend trading at the premises
  • The number of tax years you made assessed losses compared to the total tax years you were trading with cryptocurrency
  • Your business plan that includes your considerations on how to keep losses at a minimum and to trade at a profit.
  • The extent of how you use cryptocurrency for trade and not use it for personal use.

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

Image by Eivind Pedersen from Pixabay



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