SARS published a draft guide on the taxation of crypto assets in early July. Although it is not binding, even once finalised, it shows SARS’s position on the tax treatment of crypto assets. In this article, I consider some of SARS’ views in the draft guide.
Capital or revenue
The most common question on crypto assets is whether the proceeds on sale are capital or revenue. Earlier SARS material leaned towards revenue. It treated crypto assets as inherently speculative, given the volatility in the markets. Other SARS guidance pointed to the normal principles instead.
The draft guide takes the position that the normal capital or revenue principles apply to the facts of each transaction. This is arguably the correct approach. SARS lists factors to weigh. These include the taxpayer’s stated intention (not decisive), the taxpayer’s conduct and activities, the frequency of transactions, the holding period, the intention on acquisition, and the reason for the sale. The nature of the asset and its risks also matter. The outcome is therefore highly factual.
The guide confirms that the three-year rule in section 9C of the Income Tax Act (the ITA) does not apply to crypto assets. This is because a crypto asset is not an equity share. Some practitioners have suggested using the three-year rule as an indicator in any event. I don’t, however, believe one can apply a bright-line test for a specific asset as an indicator for another.
Classification
SARS states that a crypto asset is not currency. Section 24I of the ITA, which deals with foreign exchange items, does not apply to it. The value may still be expressed in a foreign currency. The rules for translating foreign currency amounts into rand can then become relevant.
Tax events
The draft guide considers events that may result in a tax liability. The first event is the exchange of crypto for fiat currency. The timing of the accrual depends on the terms of the platform. Importantly, the interest a person holds in a pool of assets on an exchange is not the asset. The interest in the specific crypto asset is the asset. Realisation happens when that crypto asset is exchanged back to fiat. Leaving the funds on the platform does not avoid a disposal.
A swap of one crypto asset for another works the same way. Instead of a money amount, the proceeds are the market value of the asset received.
SARS also indicates that using a crypto asset to pay for something triggers a disposal. The guide gives the example of crypto worth R2 500 paid for garden or landscaping services worth R2 500. That exchange is a disposal, and the tax must be accounted for. Using crypto to pay therefore carries a tax cost on top of any opportunity cost of future growth there may be on the crypto asset.
The guide also covers arbitrage, mining, staking, airdrops and hard forks as possible realization events.
Take-home message
The draft guide does not settle every question that may arise in relation to crypto assets. It does however provide useful insight into SARS’s position on key aspects, in particular, the position on when crypto proceeds are capital or revenue.
You can listen to Episode 82 of my podcast, Tax Break, for more on this topic:
