The world of cryptocurrencies came back into public focus this year with the popularity of NFTs, Elon Musk’s push to get Dogecoin to the Moon and Tesla’s brief experiment with Bitcoin.

Truth be told, cryptocurrencies haven’t become unpopular and one only needs to look at how quickly the latest generation of GPUs flew off of the shelves – thanks to miners – to see that.

There is, however, a question that comes up rather often during conversations about cryptocurrency – what are your responsibilities as regards tax?

Unfortunately the answer isn’t straight forward but Webber Wentzel has provided some advice for those dabbling in the realm of cryptocurrency.

For starters you need to ask yourself the following questions:

• Have I sold cryptocurrencies?
• Have I exchanged one cryptocurrency for another?
• Have I purchased goods and services using cryptocurrency?
• Have I mined or forked a cryptocurrency?
• Have I received staking rewards in cryptocurrency?
• Have I sold my staked rewards?
• Have I received air-drops of cryptocurrency?
• Have I used cryptocurrency as collateral for loans?

If you’ve answered yes to any of these questions then you need to pay your fair share of tax.

But what tax are you paying? That depends on how you use your cryptocurrency so lets start with how you might be taxed on long term gains on cryptocurrency, or the disposal of cryptocurrency as it is known.

“SARS has not issued an interpretation note on the tax implications of crypto assets. Crypto is defined as a ‘financial instrument’ in the Income Tax Act 58 of 1962, as opposed to ‘currency’ which would have excluded crypto gains from the ambit of capital gains tax. This means that the intention of the taxpayer, supported by objective factors such as length of holding and frequency of trades, would determine whether the crypto gains are revenue (taxed at a maximum of 45%) or capital in nature (taxed at a maximum of 18%),” explains Joon Chong and Lumen Moolman, tax specialists at Webber Wentzel.

Clearly, cryptocurrency holders would prefer they pay the lower capital gains tax but how does one prove their earnings are capital based and not income based?

The tax specialists say that SARS may look to cases involving the disposal of Krugerrands for guidance.

“In ITC 1525, the taxpayer held Krugerrands for 12 years and the purchase was made with the intention to provide funds for a rainy day. The Krugerrands were sold to inject capital into a new business. In ITC 1526, the taxpayer held Krugerrands from eight months to nine years. They were purchased to provide a store of wealth for the taxpayer’s children and protection from inflation. They were sold for various reasons, including to make improvements on and purchase properties. The Tax Court held in both these cases that the Krugerrands were held on revenue account and subject to income tax rates,” writes Chong and Moolman.

It is advised that if you want to prove that your cryptocurrency is for capital gains that you use different wallets for trading and long term gains.

On barter transactions

Let’s say you decided to sell one cryptocurrency for another, let’s call them Coin A and Coin B. You sell Coin A for Coin B and make a bit of profit which means will need to pay tax. The amount you will be taxed on is the difference between the two coins.

What tax you will pay will depend on where the Coin was held, once again highlighting the importance of having separate wallets.

“It can be difficult to determine the market value and acquisition cost of crypto in ZAR. We suggest that the spot rate should be used for the transactions. Schedules of rates and transactions should be compiled on the calculated gains or losses on the tax return,” suggest Chong and Moolman.

“The same principles would apply where the taxpayer has purchased goods or services with crypto. The difference between the market value of the goods or services and the acquisition cost of the crypto would be subject to income tax (45%) or CGT (18%), depending on whether the crypto was held on revenue or capital account,” the specialists add.

As regards taxation on staking, mining, forking and airdrops we recommend reading Chong and Moolman’s blog here.

One of the key pieces of advice however is to consult a tax expert with regards to taxation on your cryptocurrency earning. With the cryptocurrency market as volatile as it is, it’s best to prepare for taxation rather than being hit with an unexpected bill from SARS.

[Image – CC 0 Pixabay]