Crypto investors have emerged as a key voting bloc in the US, and crypto-specific Political Action Committees (PACs) raised hundreds of millions in campaigning dollars to spend for the sole purpose of helping ensure the election of pro-crypto candidates in the November 2024 Presidential, Senate and House of Representatives election.
Why, though?
The next four years will be critical in shaping the US regulatory framework for crypto, so the industry players had an outsize interest in ensuring that the new administration is not only pro-crypto, but also (preferably) knowledgeable about the industry.
With Donald Trump’s win coming on the back of actively courting the crypto community, there is every reason to expect a friendlier US government attitude and regulatory approach towards cryptocurrencies in the next four years.
Renewed interest and higher crypto prices.
This expectation of pro-crypto leadership and regulation in the US has resulted in renewed interest worldwide in cryptocurrency instruments such as Bitcoin, and a consequent spike in their current prices.
Trading levels of cryptocurrencies are likely to increase, and there could be material gains or losses for individuals in the months and years ahead. It is therefore an appropriate moment to consider the income tax implications for South African cryptocurrency holders.
Cryptocurrency: what is the South African Revenue Service’s approach?
There is still fundamental uncertainty about the approach that SARS will adopt toward cryptocurrency trading and holdings, despite some previous media statements and announcements.
We know that SARS does not currently regard cryptocurrency as currency; they define it as a financial instrument.
Furthermore, SARS has noted that the normal income tax rules and framework apply to cryptocurrencies. There have been relatively neutral statements that profits on the sale of cryptocurrency holdings “may” be taxed either as income or as capital gains.
Currently, crypto gains or losses seem to be viewed as Capital Gains.
The questions posed about disposals of cryptocurrency in the mandatory annual tax return submission appear under the “Capital Gain/Loss” section within the tax return. This has reinforced the impression that SARS currently considers the Capital Gains Tax treatment as the relevant approach to cryptocurrency transactions.
Certain South African tax specialists beg to differ.
There are a number of tax specialists who hold the opinion that gains on cryptocurrency can only ever sensibly be regarded as revenue gains, based on the technical definitions within our existing tax law.
- This is because cryptocurrency holdings should arguably be viewed as “trading stock” under current income tax legislation.
- Unlike an asset, cryptocurrency holdings produce no income whilst held (for example, a share produces dividend income, and a property produces rental income).
- In contrast, income can only be realised upon the sale of the cryptocurrency holding itself.
- There are also no relevant holding periods (e.g., a three-year period for shares, Section 9C of the Income Tax Act No.58 of 1962) that affect the way in which trading stock gains are taxed – trading stock gains are always taxed as revenue.
Revenue vs Capital Gains taxation: what is the issue?
The implications of taxing cryptocurrency gains as revenue vs. capital are significant and material. For example, for a taxpayer at the top marginal income tax rate bracket, there would be a 27% differential in taxation payable (45% income tax on revenue vs. 18% effective Capital Gains Tax rate).
What about disclosure – isn’t crypto designed to be “untraceable”?
The complete non-disclosure of crypto gains in your tax returns would certainly be inadvisable, because SARS can feasibly obtain information about taxpayers who are trading cryptocurrencies, even if they are doing so on international exchanges with no specific South African connections.
In the absence of further SARS clarification, it would also be advisable to consider the possibility that all cryptocurrency gains and losses will be treated as revenue for the purposes of income tax at some time in the future, and plan accordingly.
Will a friendlier US attitude to cryptocurrencies affect your long-term investment plans? Make a note to discuss the implication of current and future SARS treatment of cryptocurrency trading with your tax practitioner.
By Richard Sparg, CFP® CA(SA)