Cryptocurrencies have entered the mainstream in the past few years, attracting the attention of tax authorities in leading economies. While cryptocurrencies may have been conceived as an act of rebellion against the existing financial order, the taxman will still claim his piece of the pie.
Tax consultants have warned that the South African Revenue Service (Sars) is starting to audit cryptocurrency investors and demanding that they provide proof of transactions from the various crypto investment platforms.
Yet the tax implications of cryptocurrency trading and investing remains murky, in part due to the complexity around crypto-related transactions, including:
- Hard-forks (where one cryptocurrency splits into two separate ones),
- Airdrops (where a new cryptocurrency is sent to owners of an existing cryptocurrency),
- Staked rewards (where a cryptocurrency earns you a type of interest), and
- A host of other cryptocurrency specific developments.
The crypto market moves at a lightning pace, but regulators and tax authorities have been slow to keep up and this has left many crypto investors scratching their heads on what to do for their year-end tax returns.
Taxpayer non-compliance is made easier by the ability to hide assets in undetectable wallets. Only when cryptos are sold through recognised crypto service providers, such as Revix, do they become visible from a tax and regulatory perspective.
This much we know: if you are deemed to be a resident of SA for tax purposes, you are going to be taxed on your worldwide income, and that includes cryptocurrency gains and income paid in the form of cryptocurrencies.
Having a general idea of when taxable events occur make it possible for crypto investors to make informed decisions and avoid working in breach of local laws.
Sean Sanders, CEO of crypto investment platform Revix, which is backed by JSE-listed financial services group Sabvest, explains: “Most people aren’t being paid for goods or services in cryptocurrency, rather most are buying cryptocurrencies with the goal that they increase in value. Merely holding cryptocurrencies in a wallet at year end is not a taxable event, however, it is a taxable event when you sell your holdings and realise a gain capital gain or loss.
Tertius Troost, tax specialist at Mazars, says Sars does not view bitcoin as a currency, like the rand. “It views it as property – like your car or house. That distinction has not been tested in court yet though, and perhaps one day it will.
Capital gains from crypto sales
A capital gain is a rise in the value of any asset held, whether it be stocks, real estate, or in this case, ownership of cryptocurrencies. A capital gain is only realised from a tax perspective when the asset is sold.
It is important to differentiate between a short-term gain, where the asset is held for less than a year and taxed at a higher marginal tax rate, and a longer-term gain where the sale will be taxed at the more favourable rate for long-term capital gains.
Here is the generally accepted rule:
- If you are making profits from trading crypto, this will be deemed as income and taxed at your marginal tax rate (on a sliding scale up to a maximum of 45%);
- If you buy and hold crypto for an extended period and then sell at a profit, capital gains tax (CGT) will apply (your capital gains gets added to your annual pre-tax income. The CGT rate can range from 7.2% to 18% depending on the tax bracket you’re in.).
Beyond this, there are vast areas of uncertainty. Sars has yet to issue specific guidelines on the treatment of crypto, but it is starting to pay closer attention to this emerging asset class and further guidelines are expected in due course.
“One of the reasons we encourage a buy-and-hold strategy when it comes to cryptocurrency investing is because of the tax benefits. It’s the difference between a 26% return and a 0% return in some cases,” explains Sanders.
If you are looking to diversify your portfolio with cryptocurrency and invest over long-term, there is a right way and a not-so-right way to do it.
The right way
Investing in one of Revix’s crypto Bundles – a single investment option that provides exposure to a diversified basket of cryptocurrencies that is automatically rebalanced every month – is not deemed by Sars as trading assets and therefore, benefit buy-and-hold investors through capital appreciation. Only when the Bundle is sold are the gains taxable at the applicable capital gains tax rate. Additionally, investing in one of Revix’s Bundles with as little as R500 also means that you’ll be able to make use of your annual exclusion of R40,000 should your investment increase in value. This means that you won’t be taxed on R40,000 worth of profit, assuming that you don’t invest in any other asset for that year.
Revix’s three crypto Bundles can be found at www.revix.com.
- The Top 10 Bundle, spreads your investment equally over the 10 largest cryptocurrencies which covers about 85% of the crypto market when measured by market capitalisation – with each having a 10% weighting.
- The Smart Contract Bundle tracks those cryptocurrencies that aim to offer an open-source, public network without any downtime, fraud, control, or interference from third parties. Smart Contracts use the blockchain to allow peer-to-peer transactions without the need for third-party verification. This bundle comprises cryptocurrencies, such as Ethereum, that enable developers to build applications on top of their blockchains – much like how developers build mobile apps on top of the Apple mobile iOS operating system. The cryptos in this bundle include Ethereum, Cardano, Tron, Neo, and EOS.
- The Payment Bundle provides exposure to the largest five payment-focused cryptocurrencies looking to compete with government-issued fiat currencies to make digital payments cheaper, faster, and more global. These cryptos include the likes of Bitcoin (BTC), Litecoin (LTC), Bitcoin Cash (BCH) and Stellar (XLM).
The not-so-right way
Creating your own cryptocurrency portfolio and then performing regular reweighting and rebalancing, beyond being time consuming and tedious, may also become an expensive strategy as each profitable sale may be deemed a realised trading gain and would be subject to income tax at the investor’s marginal tax rate. This is the rate at which Sars taxes you based on your annual income. Even if you switch one crypto for another, such as Bitcoin for Ethereum, that may be deemed a realised gain and therefore subject to tax at the marginal rate. Additionally, you won’t have a R40,000 capital exclusion buffer as the gains will be deemed similar to income.
Wiehann Olivier, a partner in the audit division at Mazars, says if you receive Bitcoin as a gift or for remuneration, there would be a tax event. “If the services rendered was worth R5 000, that would have to be declared and tax paid on that amount. But if this payment was in Bitcoin and you held on to the Bitcoin which is now worth R50 000, you do not pay tax on the theoretical profit on this asset until the point at which it is sold.”
Another scenario that could pose a problem for the taxman: a SA resident does a barter trade, selling services for Bitcoin, and then uses that Bitcoin to make various purchases in US Dollars. The Bitcoin is not sold for a realisable gain but is steadily depleted through spending. There is no observable tax event in this case, as the Bitcoin is not sold for a profit, nor is it used for generating an income.
What about a Bitcoin miner using specialised computer hardware and using electricity to generate Bitcoin? The hardware, software, and electricity expenses (as well as other expenses that are not of a capital nature) should be deductible against any income. However, the Bitcoin generated in this case is seen as income and is therefore taxable.
If you are Bitcoin mining using solar power, you should be able to claim that hardware expense as a deduction against income.
If you are doing Bitcoin mining in your house, you will have to separate out the electricity used in mining from that used to run the household. This may be largely theoretical in SA given high set-up costs for Bitcoin mining operations to compete with the data warehouses operating in China, Russia or elsewhere.
Troost points to another scenario that would impact your tax position: “If you financially emigrate, there is a deemed disposal of all your assets on the date you emigrate, so capital gains will be applied on cryptos in your possession, even though they are not physically sold.”
What about “staking” – where cryptos are lent to the blockchain network to validate transactions, allowing the crypto owner to earn interest. This interest ranges from 4% a year on Bitcoin to as much as 10%. This interest would be deemed as income, and therefore, subject to income tax at the marginal rate, says Troost. It remains unclear whether this would fall under the tax-free interest threshold of R23 800 a year allowed by Sars.
Many crypto owners are concerned that local and overseas exchanges will share information with Sars. There is no legal requirement by exchanges to report customer trade history to Sars but will generally do so, should Sars demand that information. “Crypto investors should also be aware of the Common Reporting Standards where tax authorities worldwide share information – which means your offshore crypto transactions may well be reported back to Sars,” adds Troost.
What if you take out a loan in rands to purchase bitcoin? You can deduct your interest payments from taxable income, but if you later sell the Bitcoin at a profit, you will have to pay capital gains tax.
For you personally: broader is perhaps better
You can pick individual cryptocurrencies to invest in, but even experienced traders struggle to choose individual/specific cryptocurrencies that consistently outperform the overall market.
So, it is perhaps no surprise that the simple and low-cost solution of diversified crypto Bundle investing through Revix – which track the broader crypto market as a whole – has become such a hit with investors. By buying a slice of Bitcoin, Ethereum, and Cardano all in one, you reap the rewards of their successes without getting dragged down too much when any single cryptocurrency pulls back sharply like what Ripple did recently.
Revix’s algorithms automatically rebalance a customer’s Bundle holdings monthly, so that they are equally weighted to ensure that they stay current and capture emerging cryptocurrencies. An equally weighted bundle ensures that holdings are as diversified as they can be. There are advantages to having a bundle equally weighted rather than market weighted. In a market-weighted bundle, more than 75% of your investment would be in Bitcoin and Ethereum. In the Top 10 Bundle, your Bitcoin and Ethereum holdings are capped at 10% each, so you get wider exposure to some of the other emerging stories in the crypto space.
Brought to you by Revix.
For more information, visit Revix.
This article is intended for informational purposes only. The views expressed are not and should not be construed as investment advice or recommendations. This article is not an offer, nor the solicitation of an offer, to buy or sell any of the assets or securities mentioned herein. You should not invest more than you can afford to lose, and before investing please take into consideration your level of experience and investment objectives, and seek independent financial advice if necessary.