Crypto: Tax Compliance and Reporting

By Gerhard Nienaber, Director, KISCH Tax Advisory 

In 2018, 'Cryptocurrency’ was introduced into the definition of 'financial instrument' in the Income Tax Act No. 58 of 1958 (“ITA”), making cryptocurrencies fall within the scope of targeted provisions of the ITA, including anti-avoidance regarding the use of financial instruments. In 2020, the definition of 'financial instrument' was broadened further when 'cryptocurrency' was changed to 'crypto asset' (thus denoting a wider range of intangible assets within the scope of targeted provisions).

In 2020, the OECD conducted its first survey of the tax treatment of crypto asset transactions among participating countries and concluded that the following taxable events should be included in comprehensive country guidance:

1. The creation of crypto assets by mining, ICOs and airdrops;
2. The exchange of crypto assets for other crypto assets, for fiat currency, or goods and services (including as payment of wages);
3. Disposal by gift or inheritance;
4. Loss or theft; and
5. Hard forks (included in 'emerging developments').

Following this, the five crypto asset transactions not addressed in the SARS guidelines included:

1. Blockchain hard forks;
   Airdrops;
2. Donating crypto assets (including charitable donations);
3. Initial Coin Offerings; and
4. Loss or theft.

For the transactions addressed, the SARS guidelines were, as a whole, consistent with those of other jurisdictions regarding income tax consequences. The SARS guidelines did not, however, address business users of crypto assets to the extent of the benchmarked jurisdictions and contained significantly less detail than the guidance of the benchmarked jurisdictions (for example workable samples of various addressed transactions).

SARS’ Cryptocurrencies inclusion in the Income Tax Act in 2018 and 2020 aside, both applying local tax rules to and complying with local tax rules in the current crypto-investment environment is challenging (and will continue to change in the future) and will almost certainly require professional expertise to navigate. Where the amount of tax owed has been incorrectly determined, SARS is empowered to levy understatement penalties of up to 200% of the shortfall.

As the primary source of information, SARS requires taxpayers to disclose crypto-investment gains and losses (transaction awareness is imperative if SARS is to apply the relevant tax regulations and necessary compliance requirements). Transaction awareness is difficult for SARS, because they cannot access a crypto-investors on-chain digital trail of investments (P&L). This is a dynamic environment, and advancements are being made with regards to tax collection in this space every day. For off-chain audits, some tax authorities make use of information available at digital currency exchanges and/or peer-to-peer facilitators. Tax authorities also utilise information from other revenue authorities and specific requests for information – see country-by-country reporting, the Convention on Mutual Administrative Assistance in Tax Matters, the Foreign Account Tax Compliance Act, and the Multilateral Convention to Implement Tax Treaty-Related Measures to Prevent Base Erosion and Profit Shifting (BEPS). Taxpayers should not discount the risk of tax authorities uncovering what they think are otherwise anonymous transactions.

When it is time to submit your comprehensive cryptocurrency reporting to SARS, retrieving and tracking this data can be time-consuming and one must be aware of the high risk for errors, especially when using multiple wallets/different exchanges. Manual intervention and data manipulation will almost always be required, and it is highly recommended that a professional be engaged to assist you in these matters. Also, you will require the assistance of someone who is well-versed in different tax rules and their interpretation, for example, those governing capital gains tax. Cryptocurrency is also a new enforcement area for SARS, so it is helpful to have a professional who is experienced in dealing with SARS to represent you.

The crypto environment is a rapidly evolving technology with specific events including inter alia a hard fork. A hard fork is when an underlying crypto assets blockchain undergoes a major software change, resulting in a split of the blockchain. When this happens, the holder of the underlying crypto asset receives free new crypto assets from the newly created blockchain just by holding the underlying crypto asset. The free new crypto asset is thus an increase in the crypto holders’ wealth. So, how should hard forks be taxed? The famous hard fork was the 2017 Bitcoin hard fork where Bitcoin holders received new Bitcoin Cash at a ratio of one Bitcoin Cash to one Bitcoin. As mentioned previously, SA does not currently have any specific tax legislation on crypto asset hard forks including any interpretation notes or guides in relation thereto, whereas international jurisdictions have provided specific tax guidance and laws on crypto asset hard forks.

In terms of local (South African) current and future cryptocurrency industry regulation, please note the below:

On 11 June 2021, the Intergovernmental?Fintech Working Group (IFWG), as well as the new Crypto Asset Regulatory Working Group (CAR WG) published a position paper on crypto assets setting out a vision, purpose, reasoning, recommendation, process, and how-to implementation of crypto regulations. Members of IFWG are:

• South African Reserve Bank (SARB)
• Financial Intelligence Centre (FIC)
• The Financial Sector Conduct Authority (FSCA)
• National Treasury (NT)
• National Credit Regulator (NCR)
• South African Revenue Service (SARS)
• Competition Commission

Detailed recommendations for regulations were grouped into three categories, namely:

1. Implementation of Anti-Money Laundering and Combating the Financing of Terrorism framework;
2. Framework for monitoring cross-border financial flow; and
3. Application of financial sector laws (cryptocurrency be seen as a financial product).

The position paper also highlighted priorities such as:

1. The implementation of?prudential regulation (financial firms required to hold adequate capital and control risks for their investees to avoid any spill over/threat to the financial economy). SA will look for guidance here from the work currently, this work carried out by the Basel Committee on Banking Supervision (BCBS); and
2. Implementing a monitoring program for crypto assets.
   2023 also saw the establishment of The Crypto Asset Association of South Africa, (CAASA), an Industry Association representing the interests of both South African Crypto Asset Services providers and their clients. Their vision is to promote ethical and accountable self-governance for crypto asset service providers, working within the bounds of a fit-for-purpose regulatory framework.

Keep in mind that the Financial Sector Conduct Authority (“FSCA”) has declared crypto assets as ‘financial products’ under the Financial Advisory and Intermediary Services Act of 2002 and, so, everyone providing advice and/or intermediary services with regards to crypto assets must hold a license as a financial services provider (a Crypto Asset Services Provider/‘CASP’ license). FSCA has issued less than 100 of the almost 400 license applications it had received by mid-2024 due to applicants failing to prove the necessary in-depth business operationalisation required, including deep competency of crypto asset risk managers. In South Africa, token issuers are still not specifically regulated under securities and financial markets laws, including inter alia the Financial Markets Act of 2012. This is expected to change in the future with the FCSA introducing and passing regulatory amendments.

Unlike other jurisdictions considering drafting and tabling new pieces of legislation for the regulation of crypto assets, South Africa seems to be incorporating/wanting to incorporate crypto regulation into already existing legislative frameworks.?As is often the case, the law/regulations are lagging behind the technology, and we will have to wait and see what future regulations are soon to be coming down the pike.

If you have any queries on the above or require any tax advice, please contact:

Gerhard Nienaber 
Director
KISCH Tax Advisory 
+ 27 82?771 9549
Gerhardn@kisch-ip.com