Understanding personal taxation and cryptocurrency
Q: What info is required to be submitted to SARS regarding Cryptocurrency transactions and in what format?
A: You will need to treat it like transactions and keep a detailed report of all your transactions. For example: the date you purchased cryptocurrency, the cost amount spent on the asset, the date you sold the cryptocurrency, the amount you sold it for and the profit / loss you made.
Your purchases of cryptocurrencies will be reported on the balance sheet (asset). Treat it exactly the way you would treat the purchase of stock, and your profit will be reported on your income statement. Only once you have sold your cryptocurrency will the profit be realised by you and declared as profit to SARS.
Example: On 17/03/2020 you bought cryptocurrency at a cost of R50 000 and on 23/06/2020 you sold it for
R85 000. The Profit you made will then be R35 000. Only the Profit is taxable.
However, if you trade regularly, and it is part of your income, it can be seen as revenue, and therefore be treated as revenue (tax). If you have a full-time job and you only trade with cryptocurrencies as a hobby your profit will then be treated as capital gains tax. SARS will accept any format as long as they can read what is on the document and what currency you bought. If it is a Word document, PDF, Excel or handwritten on paper, as long as all the information is visible and clear, they will accept it. When you buy or sell, it needs to be a detailed record in any format for SARS to accept. This includes short and long-term trades, staking and interest bearing savings accounts on exchanges, as well as de-fi opportunities. Generally short-term trades are seen as revenue; therefore, you pay full tax on the profit. Generally long-term trades are seen as capital gain; therefore, you will pay capital gains tax on the profit. Only the buy and sell of cryptocurrencies is in this case important to SARS.
Q: What deductions are permissible for cryptocurrency transactions i.e. Cost of advisory services, ISP costs, area of dwelling, rent/bond, electricity, laptop etc.
A: Any expense “incurred in the production of income” is tax deductible. So, to answer your question, you can deduct advisory costs, ISP costs area of dwelling, electricity and your laptop. However, if you deduct your laptop, it depreciates over a period of 3 years.
If you want to claim your area of dwelling, SARS generally requires the blueprints of your property, where you highlight the area that you use mainly for work, if it is reasonable. Example: If your property is 200m² and you only use 16m² as your main office, this is how you will calculate the percentage of interest deductible on your bond: 16/200 = 8%. This means you can claim 8% if it is reasonable.
Q: How do they want you to report earnings from any cryptocurrency that you are earning interest on, on a crypto platform i.e., 4.4% on Ethereum, 10.7% on Tron, 5.8% on Chainlink?
A: You will need to pay tax on any interest received on any type of cryptocurrency, irrespective of the platform. Example: If your crypto is R60 000 and within months the interest you received accumulates to R66 000, you will need to pay tax on that R6000 interest that you received.
Q: Do they just want the annualised earning per token per year?
A: Yes, per financial year from Mar to Feb.
Q: Is it a taxable event when you realise and re-capitalise your investment on a monthly or quarterly basis?
A: Monthly is taxable. Any transaction made by you if it is per day or per week, it is taxable. Per transaction per day is taxable.
Q: Do they want the interest earned itemised per token or collated into a single amount?
A: SARS will be happy with a single amount, if it was prepared by a 3rd party, meaning they will then issue you an IT3b certificate, showing that single amount. If it is prepared by yourself, SARS generally requires a breakdown of the itemised earnings per token.
Q: If you have funds that you have put into a De-Fi project on an overseas platform that is paid interest for staking, the interest is payable in the token daily and re-invested for compounding purposes, how is this reported?
A: When it is capitalized or not, you will need to pay tax on any interest received or profit gained from a transaction. Your token daily income / profit will also need to be paid tax. You will need to keep a detailed report of all transactions and interest received.
Q: If one wants to legally transfer token from SA to an overseas platform, what are the permissions required to do this? As SARS has now deemed this to be a criminal offence.
A: You will need to get a tax clearance per transaction every time for investment purposes. So, if you have 60 transactions, you will need a tax clearance for every transaction made, which totals to 60.
Up to R1Mil SARS sees it as discretionary allowance, meaning they don’t ask questions and you can do what your heart desires with that R1m. After that, the next R10Mil, will need a specific breakdown, where you want to invest, why you want to invest, and when you want to invest, any important reasons for investing they will require.
SARS allows R1Mil per person, per calendar year to invest in overseas platforms, as discretionary allowance, if you have a tax clearance for all transactions made.
Q: Who do we need to contact to complete any documentation required for Reserve Bank permission.
A: Your personal bank.
Q: I understand the difference between investing, for the growth of wealth (capital gain) and trading, to derive a short term profit (income stream), and that they are reported on different sections of the tax return forms.
A: Yes, that is correct.
Q: Does SARS allow for the expenditure required for these independent ventures i.e.
- Area of residence used in the pursuit of income: Yes
- Cost of ISP: Yes
- Subscriptions to Consultative Services: Yes
- Depreciation of hardware i.e. Laptop: Yes
- Furniture depreciates over 6 years
- Equipment example: printer depreciates over 5 years
- Laptop depreciates over 3 years
Q: Are there a specific number of trades per annum that need to be conducted to qualify for these deductibles? Is it based on the Rand Value profit from these endeavours?
A: No, only when you made a profit, will you be allowed to make these deductions. You are allowed to pile up your deductions over a long period and once you made a transaction that made profit, you can deduct one big amount. But it all depends on if it is reasonable to SARS. If, for example, you only made 3 transactions per year, SARS will then divide those 3 transactions with every day of the year: 3/365. This will intitle them to make a conclusion of what you can deduct, depending on the time spent on every transaction. (ie a very few transaction will be frowned upon if you try claim you third bedroom as an expense.
Q: Historically, I have had the deductibles refused, but the profits still taxed, and told the volume of trades did not justify the deductions. How can they still tax this as a revenue stream them?
A: Section 11A of the Income Tax Act entitles you to claim any expenses. If you are not happy that SARS disallowed your deductibles, you can do an objection, which then requires an agent working at SARS, to go through everything thoroughly.
Q: SARS, in their documentation, refer to Source Codes when completing the tax return. Where does one get the prerequisite Source Codes for income earned, or capital gains realised?
A: On your tax return on eFiling, under your income statement they will show the code next to the figures that needs to be captured. When you hover your curser over the number it will pop up a description for what figure needs to be captured. You don’t need to know the codes by heart. You can also google Source Code SARS.
This article is intended for information purposes only. Each case should be evaluated on its own merit and is subject to a consultation.
Source and credits:
Position Paper on Crypton Currencies (Crypto Assets Regulatory Working Group) – https://www.resbank.co.za/en/home/publications/publication-detail-pages/media-releases/2021/IFWG-CAR-Working-Group-position-paper-on-crypto-assets
South African Revenue Services (SARS)
Tax Tim
Sanlam
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