Don't try hiding crypto profits from the taxman

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Crypto investors must remember that they still have to report such transactions and must make sure they comply with all the tax requirements. Photo: Chesnot/Getty Images
Crypto investors must remember that they still have to report such transactions and must make sure they comply with all the tax requirements. Photo: Chesnot/Getty Images

PERSONAL FINANCE


Any company that has recently made an effort to include crypto-related information on its tax return would have escaped a strict audit by the SA Revenue Service (Sars) and a resulting fine of 125% of the additional tax it owed.

So, be warned: declare in full what you make from crypto to Sars, says Thomas Lobban, a tax specialist at Tax Consulting SA.

This means people who invest all their money in crypto and make millions in profit – traders, crypto miners, part-time investors and even taxpayers who almost passively earn a return from their crypto hobby.

READ: Reserve Bank to end ‘crypto Wild West’ in SA

Lobban says it was precisely the meagre crypto information on the relevant company’s tax return that attracted Sars’ attention and led to an audit going as far back as five tax years. Although the tax evasion was not crypto-related, crypto was a warning light.

He says Sars is still slow to ensure crypto-related tax compliance because it is probably waiting for planned regulations on cryptoassets to take effect. But afterwards, Sars can apply compliance in this regard, even retroactively.

The SA Reserve Bank has announced that it will implement a regulatory framework for the country’s crypto sector within the next 12 to 18 months to, among other things, establish a safer crypto ecosystem and protect investors.

READ: Who are South Africa's cryptocurrency investors?

Lobban warns that there is no time limit on how far Sars can go back – even to the 1960s if it wants to.

Jonty Leon, managing partner and tax expert at Leap Group, foresees that, in view of the shrinking tax base, Sars will be even stricter in future regarding all income streams, not just crypto.

According to him, some investors have cryptoassets that they previously hid from Sars, and now do not want to declare them for fear of the tax burden that may arise from this.

However, crypto is no longer the “black market” of investment where people think they can hide and secure the maximum return. Crypto is now a standard investment instrument that, due to its volatility, carries the same or greater risk than general investment.

Taxpayers should not fool themselves into thinking they can hide their cryptoassets. Apart from heavy fines, it can lead to criminal action in serious cases.

Lobban agrees. Many taxpayers think they are too small for Sars to look closely at, but just as a traffic officer doesn’t care if you drive a Ferrari or a scooter if you’re speeding, Sars is keen to know about any noncompliance of your tax liability.

According to Nicci Courtney-Clark, head of operations and tax at TaxTim, they are seeing ever more taxpayers declaring their crypto activities in the current tax season, but their clients have not yet been subjected to specific audits about this.

Lobban says that, if a taxpayer has properly declared their cryptoassets, Sars mostly accepts it, but there have been cases in which taxes due have been adjusted based on trade profit or capital gain that was incorrectly declared.

Sars does not select all tax returns on which crypto profits or losses are declared for verification or audit.

It’s advisable to get expert advice on this. Although most taxpayers are aware there are tax implications for crypto transactions, many still mistakenly think it’s only about capital gains tax or that taxes are charged when you withdraw the value, Lobban says.

Even crypto-to-crypto transactions are taxable, he warns.

On the other hand, you must declare a loss in the relevant year, otherwise you will not be able to write it off against profits later.

Sars says expenses incurred in the trading of cryptoassets are tax deductible provided they meet all the requirements in tax legislation.

Megan Landers, manager of international tax at AJM, says taxpayers should not think they can hide something like crypto transactions from Sars.

By law, Sars obtains information from third parties such as banks, financial institutions and the 12 largest cryptoasset service providers in the country about users on their platforms.

Landers explains that income or profit that individuals generate by trading in crypto usually comes from selling or exchanging crypto, mining it, or using crypto as securities.

The individual’s intent to acquire, sell or hold crypto will determine whether they are taxed at the income tax or capital gains tax rate.

Lobban says everyone, including Sars, knows tax compliance with crypto is a problem, since many crypto investors are not declaring their returns from it. However, third-party information available to Sars means there is little chance of getting away.

READ: Squid crypto a blow for speculators

In addition, Sars has various agreements in place with foreign entities that help it ensure the correct information and declared income appear on tax returns.

Leon says crypto is very volatile and is easily seen as active buying and selling to make a profit and counts as income. With a higher income, you pay more tax.

He recently saw an increase in Sars audits with two perspectives on crypto:

. When a taxpayer declares crypto on their tax return, Sars often requires more information about the amount, the source of income from which the crypto was purchased and the nature of the investment (such as income versus capital); and

. When a taxpayer fails to declare crypto but Sars has information from a third party that the taxpayer does hold crypto, the tax collector will take a much stricter stance and conduct an audit.


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