Tax implications for marriages in community of propertyOctober 25, 2023
Landing in a position of indebtedness to SARS can be quite a stressful journey on its own ─ but if you forget to leave room in your suitcase for the tax on your crypto profits or gains, the destination becomes all that more daunting. If you have engaged in crypto trading, even as a hobby, not knowing the underlying tax obligations may just take you to your final (unpleasant) destination!
What is a crypto asset?
The Taxation Laws Amendment Act 23 of 2020 concretised the classification of a ‘crypto asset’ ─ which, according to SARS, can be described as “a digital representation of value that is not issued by a central bank, but is traded, transferred and stored electronically by natural and legal persons for the purpose of payment, investment and other forms of utility, and applies cryptography techniques in the underlying technology.”
As we now know, under South African domestic law, a crypto asset is not considered currency, but rather to have a capital or revenue nature ─ circumstance dependent.
What this means is that normal income tax rules will find application with crypto assets, and traders would need to declare any loss, gain, or profit per tax year. This will fall either under ‘gross income’ or ‘capital gain’, depending on whether your crypto asset is held for trading purposes or as a long-term investment.
SARS is always one step ahead
The onus of declaration, as with any other capital gain or revenue received, rests with the taxpayer. By failing to do so, the taxpayer will face under-declaration interest and penalties. Where a taxpayer has omitted to declare their crypto asset income, they may be subject to consideration that such non-compliance is a criminal offence.
When completing the form wizard on the individual tax return via e-filing, you would need to indicate the number of disposals of any local and/or foreign assets during the year that attract a capital gain or loss ─ this includes crypto assets.
If you are trading in crypto assets, such trades must not be disclosed under the ‘Capital Gain / Loss’ section but rather under the ‘Local Business, Trade and Professional Income’ section.
In light of the volatility of crypto-markets, it is often the case that where substantial profits/gains are made in a year of assessment, the value of the crypto-assets has significantly changed by the time the filing season opens.
In these instances – more so in recent times – this change may well result in a lower value position for the crypto-asset holder, to the extent where even liquidation of their crypto holdings will not satisfy the tax debt now due to SARS.
So, you have landed at your destination, with your crypto assets in one hand and a tax debt in the other. Where do you go next?
The importance of using a map for your journey
SARS follows the same protocol for any tax debt that is outstanding, including those cases that involve crypto assets. This means that SARS will issue the taxpayer a Letter of Demand indicating what the outstanding debt is. This will also include a time frame in which the taxpayer must settle the debt. However, what SARS doesn’t tell the taxpayer is that the tax laws provide for various tax debt relief measures that are available, to provide the taxpayer relief and a feasible way forward.
Where a taxpayer does not have legal merits to pursue any form of dispute pertaining to the tax debt arising from its crypto trading, but has difficulty in settling their tax debt, a Compromise of Tax Debt application may be available to the taxpayer.
The Compromise aims to aid taxpayers in reducing their tax liability by means of a Compromise Agreement, which the taxpayer enters into with SARS. Where a taxpayer approaches SARS correctly and their financial circumstances warrant it, SARS can reduce the tax debt, and the taxpayer can pay off the balance in terms of the Compromise. In the end, total tax compliance is the ultimate goal, be it through the rectification of an error by SARS or securing a settlement that is more affordable to the taxpayer in a given instance.
It is easy to take a wrong turn when dealing with SARS, but taxpayers must have cognisance and understanding when it comes to a tax debt ─ what it means, how it comes about, and how you can navigate SARS’ processes before hitting a dead end.
Should crypto traders find themselves dealing with unaffordable tax debt, they should take quick action to prevent further piling of interest and penalties onto an already precarious situation. In these instances, it is recommended to obtain the help of a tax attorney, well versed in both crypto-asset regulations, as well as tax debt negotiations, to safely assist in navigating the available tax debt relief solutions.
WRITTEN BY KIARA NAIDOO AND JASHWIN BAIJOO
Kiara Naidoo is a tax attorney at Tax Consulting SA.
Jashwin Baijoo is the head of strategic engagement and compliance at Tax Consulting SA.
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE).