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Taxation of Crypto Assets in South Africa

Crypto Assets

SARS and Crypto Assets

The South African Revenue Service (SARS) has set its sights on a new lucrative income source. For the last five years, we (CH Consulting) have been calculating crypto taxes for clients, it is safe to say we have performed more calculations in the last year than in the previous four years. SARS is currently using the media to drive fear into the crypto traders who were under the impression they could escape SARS's radar.

For years many crypto traders used the excuse that no one is sure how to tax crypto assets, therefore they can refrain from declaring anything to SARS. One can understand that this was the view of the crypto traders as SARS kept silent on the issue until they released their first media release to clarify their stance on the tax treatment of crypto-currencies on 6 April 2018 and made the following main points:

  • Cryptocurrency is not a currency, but rather an intangible asset
  • The current tax framework is clear on the taxation of assets and therefore no further clarification in terms of an Interpretation Note is required
  • The same revenue vs capital gains considerations should be applied as with other assets
  • Crypto mining will result in income and subsequently be taxed as an asset depending on intention (as per revenue vs capital gain rules)
  • SARS will review the VAT treatment on cryptocurrency

Later in 2018 SARS published a list of Frequently Asked Questions (FAQs) with the answers indicating that the existing framework covers the trading of assets and no new rules are applicable.

Since 2017 we have been taking a firm stance that cryptocurrencies should be seen as assets and not a currency and therefore treated as such under the Income Tax Act 58 of 1962 (income tax act). SARS has been vocal on this issue lately, to such an extent that they replaced the word "cryptocurrency" with "crypto asset" in the Explanatory Memorandum on the Taxation Laws Amendment Bill as issued on 20 January 2021. The main reasoning for the classification:

  • In South Africa, the word "currency" is not defined in the Income Tax Act.
  • Cryptocurrency is not an official South African tender currency
  • Cryptocurrency is not widely accepted in South Africa as a method of payment

In August 2021 SARS published a Crypto Assets and Tax page on its website. For the most part, they did not say anything new on this page. They have given an example of how crypto assets should be declared on the income tax return of an individual (ITR12). This example only shows the capital gains case, which may confuse taxpayers as no example of the revenue case is given.

Tax Treatment of Crypto Assets under the Income Tax Act

SARS has made clear that crypto assets should be treated as assets under the income tax act. This may be a contentious issue for many, however, that is an argument beyond the scope of this article. The taxpayer does not have an alternative - either abide accordingly or face the consequences of non-compliance.

A practical explanation of the application of the existing income tax framework to crypto assets will be presented.

A taxpayer is taxed on a crypto asset transaction for the following scenarios:

  1. Realise crypto assets by selling the crypto asset for fiat currency (e.g. ZAR, USD)
  2. Realise crypto assets by trading the crypto asset for another crypto asset (e.g. Bitcoin (BTC) to Etherium (ETH), ETH to Litecoin (LTC))
  3. Receive crypto assets for mining or staking
  4. Receive crypto assets as remuneration for services rendered
  5. Receive airdrops or rewards
  6. Earn yield on crypto assets

Realise crypto assets by selling the crypto asset for fiat currency

The scenario as follows:

The taxpayer purchased:

  • 1 BTC at R100 in 2017
  • 1 BTC at R200 in 2018

On 01 September 2022 the taxpayer decided to sell 1 BTC for ZAR. The market value of 1 BTC on this date is R500.

The question arises as to whether the taxpayer is selling the 1 BTC purchased in 2017 or the 1 BTC purchased in 2018.

SARS provides guidance on this question in Question 9 of the FAQ document updated on 23 June 2021:

The purchase price is determined on the earliest of dates for receipt or accrual. Crypto assets are not regarded as shares and therefore SARS does not treat it as the average for the year.

This indicates that the average costing method (ACB) and last in first out (LIFO) should not be used. The conservative approach would be to use the first in first out (FIFO) method as this aligns with the earlier of receipt and accrual concept. The specific identification method is not excluded, however may prove difficult in practice.

Back to the example, with the FIFO method our base cost will be R100 as we purchased our first BTC of our current stock in 2017 at R100. The selling price is the current market value of R500 and thus our gain is R400.

Next question that arises is whether this R400 gain should be included in the taxpayer's taxable income as revenue or as a capital gain. This is a question that has been delved into deep in tax literature and the tax courts of South Africa (for good reason - for an individual the current maximum tax rate if taxed as revenue is 45% vs 18% if taxed as a capital gain). Remember that the gain is on the sale of an asset, irrelevant of the fact that this is a crypto asset, thus all the normal tax rules and court cases apply to the gain. It is beyond the scope of this article to delve into this well documented issue.

It might be worth mentioning that SARS could potentially argue that crypto is seen as trading stock in line with Krugerrands. In some of the court cases involving Krugerrands we see that even though the taxpayer held the Krugerrands for many years (even 12 in one case) (ITC 1525 (1991) 54 SATC 209 C) the proceeds were taxed as revenue and not a capital gain. The warning is that there is no holding rule that will classify crypto asset realisations as a capital gain as there is with shares (section 9C).

In the November 2020 Capital Gains Tax (CGT) guide issued by SARS they state:

Given their extreme volatility, Cryptocurrencies are likely to be held as a speculative asset of a revenue nature.

A last word on the capital gain vs revenue issue is that we have seen that the majority of cases may be taxed as revenue due to the high trading volume of taxpayers and the buy low, sell high, speculative nature of these trades.

Keep in mind that if the gains are taxed as revenue, expenses as allowed under the income tax act (section 11(a) and 23(g)) can be deducted.

Realise crypto assets by trading the crypto assets for another crypto asset

The scenario as follows:

The taxpayer purchased:

  • 1 BTC at R100 in 2017
  • 1 BTC at R200 in 2018

On 01 September 2022 the taxpayer decided to sell 1 BTC for 2 ETH. The market value of 1 BTC on this date is R500.

Since crypto assets are taxed as assets, this transaction is an asset swap. This is easiest understood by the following line of thinking:

On the date of the disposal the taxpayer sells 1 BTC for R500 and then uses this R500 to immediately purchase 2 ETH. It illustrates that the taxable realisation is the sale of the BTC and the ETH that you receive in return can be seen as a purchase that may only later result in a taxable realisation. Based on this the taxpayer would make a R400 gain in our example, and the rest of the factors will be exactly the same as in our example where the taxpayer realised the crypto asset for a fiat currency.

Receive crypto assets for mining or staking

Since it is beyond the scope of this article to discuss what mining and staking is, it is sufficient to say that with mining the taxpayer is rewarded for solving cryptographic problems using publicly available algorithms and their own (or shared) hardware. On the other hand, with staking the taxpayer locks their crypto assets in a pool and receives rewards (more crypto assets) for doing so.

Both of these income sources are seen as revenue earned for certain actions on the taxpayer's part and taxed as revenue on the earliest of receipt or accrual.

The scenario is as follows:

  • The taxpayer mines and receives 1 BTC on 1 September 2020. The value of 1 BTC on this date is R400. The R400 is added to the taxpayer's taxable income as revenue earned.
  • The taxpayer is now holding 1 BTC as a crypto asset with a base cost of R400. If the taxpayer later sells the asset for fiat or trades it for another crypto asset the same rules will apply as if the taxpayer purchased the 1 BTC on 1 September 2020 at R400.

Receive crypto assets as remuneration for services rendered

The scenario as follows:

  • The taxpayer performs work for ABC (Pty) Ltd (ABC). On 1 September 2020 ABC pays the taxpayer 1 BTC after the work has been completed. The value of 1 BTC on this date is R400. The R400 is added to the taxpayer's taxable income as revenue earned.
  • The taxpayer is now holding 1 BTC as a crypto asset with a base cost of R400. If the taxpayer later sells the asset for fiat or trades it for another crypto asset the same rules will apply as if the taxpayer purchased the 1 BTC on 1 September 2020 at R400.

Receive airdrops or rewards

An airdrop is typically a marketing effort to introduce and distribute a new crypto asset. Small amounts of the relevant crypto asset is "dropped" in the wallet of an existing member of a certain blockchain community.

A reward takes a number of forms, in some cases a blockchain community member is rewarded with crypto assets for referring new members to the community, in other cases a certain action needs to be taken in order to receive the reward, such as a retweet.

Currently our view is that both of these cases will be handled similarly to receiving mining or staking rewards. Airdrops might be a more contentious issue as these crypto assets are in many cases received without the consent or desire of the taxpayer.

Earn yield on crypto assets

The Decentralized Finance (DeFi) space is rapidly expanding. A number of products are now available where you can earn a yield on the storage of your crypto assets - same principle as when you store fiat in a bank.

Currently it is our view that yield will be handled in a similar manner to receiving mining or staking rewards. At this point in time we are not aware of any South African exchanges that issue income tax certificates (IT3b's) for yield / interest earned on crypto assets and this renders the possibility of the annual interest exemption mute.

Market value of a crypto asset

The market value of a crypto asset can differ across various exchanges and there is no central authority to determine the official value. Our view is to be rational and use the exchange you traded on to obtain the market value. Crypto assets are volatile and the price can vary substantially in a single day. Our view is to take the market value average or the closing value of the day for the relevant crypto asset on the relevant exchange. For the method that the taxpayer selects for both the source of the market value and the time of day of the market value, apply this selection consistently for the relevant year of assessment.

The role of fiat exchange rates

According to paragraph 43 of the income tax act the taxpayer can either use

  • the average exchange rate for the year of assessment or;
  • the spot rate at the date of disposal

The method selected should however be applied consistently throughout.

A number of crypto asset realisation transactions will have to be calculated by taking the market value of the crypto asset on the date of disposal in USD and then converting the USD to ZAR based on the average exchange rate for the year of assessment or alternatively the spot rate at the date of disposal.

Losses realised on crypto assets

In a number of cases a taxpayer will accrue a loss on the realisation of their crypto assets in a relevant year of assessment. A question arises as to whether the taxpayer can deduct this loss against other taxable income. Section 20 and section 20A deals with the ring-fencing of assessed losses. This article will not deal with the intricacies of these sections. The main points are:

  • The loss will be ring-fenced and only deductible against future crypto asset trading gains if the taxpayer is in the highest brackets, taxed at the maximum marginal rate AND
  • The 3 out of 5 year rule apply (section 20A(2)(a)) - during the last 5 years of assessment incurred an assessed loss in at least 3 of the 5 years OR
  • The trade is a suspect trade (section 20A(2)(b)) - crypto asset trading is seen as a suspect trade

If a taxpayer is taxed at the maximum marginal rate and trading with crypto assets the loss will be ring-fenced and can thus only be deducted against future gains made with the trade of crypto assets. Once an assessed loss is ring-fenced the loss remains ring-fenced for all future years.

The above apply to local trade (only traded on a local exchange). If the trade was from a foreign source (traded on any foreign exchanges), the loss will be ring-fenced for all cases, regardless of the taxpayer's marginal tax rate. Again be careful here as an exchange like Luno is registered in Singapore, however may be perceived as a local exchange.

VAT treatment of crypto assets

The 2018 Taxation Laws Amendment Act added section 2(1)(n) to the Value- Added Tax Act, taking effect from 1 April 2019. This amendment states that where a taxpayer (vendor) issues, acquires, collects, buys, sells, or transfers ownership of any cryptocurrency, this supply by the vendor is deemed to be a supply of a financial service. Thus, based on section 12(1)(a) of the VAT Act the supply of crypto assets will be exempt from VAT. 

About CH Consulting

CH Consulting specializes in the area of crypto tax and the preparation of crypto tax reports. Aside from the taxation of crypto assets, the actual process of calculating the tax for a high volume of transactions across multiple exchanges can be daunting. They use a tech driven approach with a team of technical experts, led by their founder Chris Herbst who completed an Honours in Business Management, holds a Computer Science degree (specialising in Computer Science and Mathematical Statistics), is a SAIT member and a Certified Bitcoin Professional (CBP).

CH Consulting assists taxpayers, accountants and tax practitioners across South Africa with calculating optimised and reconciled crypto tax reports. The crypto tax reports that they deliver are robust and detailed, yet easy to understand for tax practitioners.

Should you require assistance, please email Chris Herbst at This email address is being protected from spambots. You need JavaScript enabled to view it. or phone at 021 200 5805.

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