The growing popularity of cryptocurrencies worldwide, which is increasingly leading to them gaining a stronger footing in international business, has awakened tax authorities everywhere to a possible new revenue stream from unreported gains.
In recent years we’ve seen a marked increase in crackdowns on cryptocurrency traders — from the Internal Revenue Service (IRS) in the US to Her Majesty’s Revenue & Customs in the UK and now the SA Revenue Service (Sars).
It was only a matter of time before Sars joined the party given that in terms of both market value and volume SA is reported to be one of the top two markets for cryptocurrencies in Africa, alongside Nigeria. Since cryptocurrencies are specifically intended to facilitate peer-to-peer transactions anywhere in the world on an anonymous basis, they open up opportunities to bypass the taxman’s clutches.
Recently, Sars has joined a number of other tax authorities across the globe in looking closely at ways to track gains made by traders in cryptocurrency, while establishing appropriate tax frameworks. In other jurisdictions such as the UK, authorities are investing in “cryptoanalysis” technology, which will enable them to track cryptocurrency trading.
Though Sars considers cryptocurrencies as neither official SA tender nor widely used and accepted in SA as a medium of exchange (they are not regarded as a currency for income tax purposes or capital gains tax), it does consider cryptocurrencies an asset of an intangible nature. In terms of section 223 of the Tax Administration Act, it appears that any taxpayer who intentionally omits to declare gains or profits will be penalised by up to 200% of the amount owed, plus interest.
Recently Sars sent audit requests to taxpayers requesting them to disclose cryptocurrency trades and purchases. We’ve seen similar trends in other industries, most recently online accommodation-booking businesses. This is in keeping with Sars’s campaign for stronger enforcement in the wake of Covid-19.
However, tracking anonymous virtual currency trades remains a major challenge. Following the collapse of Mirror Trading International (a bitcoin BTCaac, +3.57% trading club) in what is considered to be SA’s largest Ponzi scheme, the Financial Sector Conduct Authority is calling for formal regulation for cryptocurrencies, and more powers to probe traders.
Similar trends can be seen elsewhere. In mid-2019 the IRS announced that it had begun sending letters to taxpayers who may have failed to properly report income and pay tax associated with cryptocurrency transactions, or who did not properly report such transactions. In November 2020 the US department of justice announced that under a mutual legal assistance treaty request from Brazil it had seized virtual currency worth about $24m. The UK tax authorities employed the same approach, requesting customer information from cryptocurrency exchanges in an effort to recover taxes.
The Nigerian central bank employed a more aggressive posture, ordering the closure of accounts involved in the transfer or exchange of cryptocurrencies at the start of February 2021, under the threat of severe regulatory sanctions. India’s parliament is introducing legislation that would largely ban the use of private cryptocurrency. Media reports recently noted that cryptocurrency investors in India will be given a transition period of three to six months after the implementation of the new law to liquidate their investments.
Sars’s position on cryptocurrencies is that they should be subject to tax, depending on the intention with which they are held. Therefore, gains or losses in relation to cryptocurrencies can be broadly categorised as having three potential consequences:
- A cryptocurrency can be acquired through mining, but until the newly acquired cryptocurrency is sold or exchanged for cash it will be held by the miner as “trading stock”.
- Investors buying and selling cryptocurrencies on exchanges will be liable for the capital gains earned by the investor.
- Where goods or services are exchanged for cryptocurrencies the normal barter transaction rules will apply.
The reality is that virtual currencies are gaining a stronger footing in the domestic market as well. Two mainstream retail brands have in the past accepted bitcoin as a method of payment, though it is unclear whether this remains the case. There are already seven bitcoin ATMs in SA, the most in any African jurisdiction.
It is worth noting that cryptography often functions on the premise of a secure web, facilitating secure transactions through e-commerce and online banking, and forming the foundation of innovation in the modern economy. Sars and other tax authorities should therefore be prudent not to stifle possible innovation that may develop from cryptocurrency use.
Given the circumstances it would not be surprising if Sars introduced new regulations with a focus on digital assets and currencies, which will most likely make it more difficult to avoid tax by requiring all SA cryptocurrency exchanges to share information with Sars. It is also not out of the question to expect Sars to join forces with foreign banks, revenue services and cryptocurrency exchanges (with which agreements are often already in place), to pool resources and share taxpayers’ trading and asset holding information across multiple jurisdictions.
Taxpayers using the virtual currency should ensure they keep records of all transactions and report any such activities to the relevant tax authorities when it comes time to do so, or risk a battle with the revenue service.
• Govender is an associate and Kgomosotho a candidate attorney, in the tax practice at Baker McKenzie Johannesburg.