Thread by @AndreBothmaTax

[Thread] As promised, here's my take on the tax implications and provisions in the Income Tax Act on cryptocurrencies. Credit to @SlwaneToYou for proofreading.

1. The Income Tax Act (the Act) defines cryptocurrency as a financial instrument, which means that the normal tax provisions within the act that applies to financial instruments will also apply to cryptocurrencies.

2. The reason why lawmakers have defined it as a financial instrument is that it can be used like a normal currency, but its value determined by market supply and demand. Unlike the Rand, R 1 today is R 1 tomorrow, but 1 Doge was $0.71 on Friday, and $0.41 on Sunday

3. Income Tax: If the intention behind your purchases and exchanges are for trading or more accurately "a scheme of profit-making" then your purchases become "trading stock" and the profits are taxed at normal tax rates (18-45% for individual; 28% for company)

4. If the intention behind your purchases and exchanges are investing for long term gains, then your purchases become "capital assets" and gains will be taxed at CGT rates. CGT rates are much lower than normal tax rates (7.2 - 18% for individual; 22.4% for company)

5. There seems to be this notion that a taxable event only occurs when a crypto is cashed out to a
fiat currency (ZAR/USD etc), but this is not the case. South Africa, along with many other countries consider most movements of crypto as "taxable events"

5.1 Taxable Event 1:

Crypto to fiat -this is the one almost everyone agrees with and understands. If you sell your crypto and "cash out" then you pay either normal tax or CGT.

5.2 Taxable Event 2:

Crypto to crypto: This is the one everyone has a problem with. When you move from BTC to ETH, that's a taxable event. A disposal for tax purposes includes an "exchange". You effectively "sold" the BTC to "buy" ETH. Same as selling one share to buy another.

5.3 Taxable Event 3:

Crypto as payment - Again, everyone has a problem with this. lf you use your DOGE to pay for goods, you basically "sold" DOGE to "buy" a good/service. This is also a taxable
event.

5.4 Taxable event 4:

Crypto as an income - lf you receive crypto as a salary or for goods/services you sold, that's a taxable event. You earned the ETH paid to you, and thus need to include it in your taxable income.

5.5 Taxable event 5: Mining crypto - In South Africa, the moment that you "mine" the coin (receipt of new coin), the market value of that coin will be added to your gross income. Expenses that you incur as a coin miner can be deducted for tax purposes.

6. VAT: Trading or investing in cryptocurrencies is an exempt supply for VAT purposes.

7. So what lf you made a fat loss on the DOGE you sold as an investment?

Well that's a Capital Loss, and can only be deducted from other Capital Gains, otherwise the loss is carried over to the next tax year.

8. What if I make losses as a trader of crypto?

Bad news, get your tissues. The Income Tax Act has
included cryptocurrency as a suspect / hobby trade. This means that the losses you make on cryptocurrencies will be ring-fenced in terms of Section 20A of the Income Tax Act

9. How will SARS know about my crypto activities?

SARS has already begun to ask taxpayers about their crypto activities for its verification process - either
you lie, and face potential non-disclosure penalties, or you open your books.

9.1 These penalties can range from 10 - 200% of the tax liability, depending on the severity of the case.

10. Do sites like Binance/Coindesk share information with SARS?

Not yet, but it's up to the taxpayer to comply with the information gathering requests from SARS. It's fairly simple to get your transaction history on exchange sites.

11. What if I already filed my tax returns, but didn't declare any crypto activity?

SARS can only tax and issue non-disclosure penalties on transactions they know about. They rely on taxpayer disclosure.

11.1 lf a taxpayer had not disclosed their cryptocurrency transactions in prior tax returns submitted, non-disclosure will be a tax audit risk for them. This is a serious warning.

12. The obvious problem with exchanging crypto to crypto/product/service is that this triggers a tax
event, but not necessarily an increase in your cash-flow. So to pay the tax, you'll need to pay it from whatever cash you do have. SARS doesn't care.

13. How will SARS know if I'm a crypto investor or a crypto trader?

For now, SARS will depend on what you declare on your lTR12 where you either declare your crypto activity in the Capital Gains section or as a local business.

13.1 The onus is on the taxpayer to prove that their intention matches their actions. One thing is certain, the more crypto transactions you make the more you look like you're in a scheme of profit-making.

14. Finally, unlike shares, crypto does not benefit from the "3 year rule" which deems a share to be a capital asset if it's held for longer than 3 years. A cryptocurrency will either be a capital asset or trading
stock as per the intention of the taxpayer.

15. Summary: CGT or normal tax depending on your intention. Taxable events happen when you
sell, exchange or make almost any move from that crypto, other than holding. Losses are ring-fenced.
Exempt from VAT. Must share crypto activity with SARS or face non-disclosure penalties.

16. Top tax tip: Buying and holding is thus the most tax efficient strategy.

Sources: Income Tax Act No 58 of 1962; OECD Taxing Virtual Currencies

Finally: This is not tax advice. It is no better than a tax article you read in the news.