Unforeseen Tax Debt Arising from Crypto Trading; How Did We Arrive Here?

Landing in a position of indebtedness to SARS can be quite a stressful journey on its own; if forgetting to leave room for crypto profits or gain, in your suitcase, 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 destination!

Kiara Naidoo
Tax Attorney

Jashwin Baijoo
Head of Strategic Engagement & Compliance

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What Is a Crypto Asset for the Purpose of Filing Your Returns?

The Taxation Laws Amendment Act, 23 of 2020 (TLAB) concretized 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”, circumstance dependent.

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, he/she may be subject to consideration that such non-compliance is a criminal offence.

Example of the crypto-asset declaration on a tax return

In light of the volatility of crypto-markets, it is often the case that, where substantial profits/gains 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 results 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 tax debt in another; 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, as well as including a time frame in which the taxpayer must settle the debt. 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.

Next Steps

It is easy to take a wrong turn when dealing with SARS, but taxpayers must have cognizance and understanding when it comes to a tax debt; what it means, how it comes about and how you can navigate SARS, 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.

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