Cryptocurrency (“Crypto”) refers to a digital currency that can be used to buy goods and services. Crypto uses technology called blockchain, which is a decentralised technology that is spread across many computers that manages and records transactions. Part of the appeal of this technology is its security (more people check and verify transactions).
Crypto transactions include buying and selling Cryptocurrency, hard-forks (splitting of one Crypto into two separate ones), airdrops (where a new Cryptocurrency is sent to owners of existing Cryptocurrency), stake rewards (where a Cryptocurrency earns a type of interest) and other new developments.
SA tax residents pay tax on world-wide income, which includes Cryptocurrency gains and income paid in the form of Cryptocurrencies. The South African Revenue Service (SARS) views Cryptocurrency not as a currency, but as property like your house and car. You do not pay tax when you buy Crypto, but you do have to account for tax when you sell or trade Crypto.
The tax consequences from the sale or trade of Crypto fall into two categories, namely short-term gains (trading) and long-term gains (held as investment for an extended period). A gain is realised when you sell a Crypto for more than you bought said Crypto.
Trading and mining (Income tax)
Where a Crypto is held for less than a year and Crypto was frequently bought and sold, this will be classified as short-term gains and 100% of your gains (income less expenses) from the sale of Crypto will be included in your taxable income. This taxable income will be taxed at 28% for companies, 45% for trusts and individuals at their marginal scale of tax, which can range from 0% to 45%.
Held as an investment (Capital gains tax)
Where you held Crypto for more than a year, and preferably at least three years, and sell thereafter, the gains (selling price less purchase price) from the sale(s) of such Crypto are long-term gains and taxed at the preferable tax rates under capital gains tax.
Individuals may deduct an annual exclusion of R 40 000 from capital gains and the net is included in the determination of their taxable income at 40% and then taxed at their marginal scale of tax. The maximum tax an individual can expect to pay on capital gain is 18% (45% tax rate x 40% inclusion rate).
For companies and trusts, there is unfortunately no annual exclusion of R 40 000. The taxable capital gain is included in their taxable income at 80% and taxed at the flat rate for companies (28%) and trusts (45%). The maximum tax a company can expect to pay on capital gain is 22.4% (28% tax rate x 80% inclusion rate) and for a trust, 36% (45% tax rate x 80% inclusion rate).
If you are interested in Cryptocurrencies and trading/holding Crypto assets, speak to Finleys. We will help you make better sense of how your Cryptocurrencies will be taxed, whether you will be taxed as a Crypto-trader or Crypto-investor, and how to go about declaring the income/gains derived from these assets.
Should there be any new developments in the way that these assets are regulated or taxed, you can rest assured that we will keep you informed and always advise you on the latest available information.
Please note that these articles are to be considered general information sheets only and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information therein. Always contact one of your Finleys advisors for specific and detailed advice. Errors and omissions excepted (E&OE).