CRYPTOCURRENCY IS EITHER A POWDER KEG OR PANACEA

During 2020, crypto platforms the world over sailed into the heavens, then plummeted months later. Amid the joys and sorrows experienced by investors, come new concerns about cryptocurrency regulation and what it would mean for South African taxpayers.

To regulate or not to regulate?

SARS took the stance that crypto currencies are still an extremely volatile asset, but they have resolved that the normal income tax rules apply. The South African Reserve Bank (SARB), on the other hand, has reportedly warmed up somewhat to the idea of rolling out a Central Bank Digital Currency (CBDC) for general-purpose retail use, though they still remain critical towards it.

National Treasury has revealed that there aren’t many ways for regulators to approach crypto trading. Because South Africa is a member of the intergovernmental Financial Action Task Force (FATF), the country is required to regulate cryptocurrency service providers. In other words, crypto trading should not be banned, but it also cannot be ignored. The only option left is to regulate these platforms.

While that settles some uncertainties, it opens up an entirely different can of cryptic worms, particularly when looking at the tax complications. Cryptocurrencies have little over a decade of trade under the belt and has proven to be uncertain at the best of times, which makes hypotheses a poor tax estimation to go on.

The rules that are currently being proposed, have made tax more troublesome for investors. Given that the value of digital currencies has doubled many times over, it’s no longer a pointless debate. Investors and tax advisors need immediate clarity to understand the implications.

Here are some of the pertinent questions that have shown face:

Will SARS overlook crypto investors registered for provisional tax?

SARS are obligated not to overlook any taxpayers. However, provisional tax presents a conundrum. Calculations are done twice a year. In August, provisional taxpayers estimate their annual tax and pay 50% thereof. In February, another estimation is done and provisional taxpayers pay the balance of the newly estimated value. At the end of the tax year, a true tax value is calculated in their returns and the taxpayer either pays the difference, SARS reimburses the amount exceeding the actual tax liability, or the loop is closed for the year.

With harsh penalties for under calculations, the question remains: how will provisional tax be calculated on an investment that is in such a diverse state of flux and unpredictability? Gains and losses can soar in days, leaving investors or SARS potentially clasping at straws.

Will there be more certainty on the correct tax treatment in different cases?

While cryptocurrency should rightly be considered to be an additional source of tax revenue, the implications often entail a considerable amount of complexity. Users may realise a tax gain or loss every time they transact in cryptocurrency, which could become extremely onerous on regular users in determining the correct tax treatment, especially where the methods of investment are diverse. More clarity is certainly needed on whether crypto staking rewards, for example, would be treated as “interest” for purposes of the Income Tax Act. Treasury must come to the party in this regard, whether through the introduction of focused tax relief mechanisms or otherwise.

Will SARS yield to service providers who refuse to disclose sensitive information?

Gains on investments will generally be subject to tax, regardless where those gains were made or where (or even how) they were realised. What makes cryptocurrency an anomaly, however, is that despite the recent engagement by SARS with cryptocurrency platforms to obtain taxpayer information, some service providers will refuse to share this sensitive information. A few crypto service providers offer clients complete anonymity and these communities pride themselves on this, which means their investor portfolios are potentially vague to the point of being untraceable (for example, “ZCash” or “Monero”). It is still unclear what, if anything, SARS would do from an audit perspective in these situations if not seeking to enforce their information gathering authority.

Many taxpayers still have no idea that they are non-compliant by not declaring crypto profits. While some form of leniency should be extended as new rules are introduced, it is dangerous to assume that SARS will be gentle towards transgressors. To avoid the harshest consequences, crypto investors should always consult a tax professional who is up to date with current legislation and plug compliance gaps before they arise – or at least before SARS approaches them (or their platform) first.