Crypto assets are gaining a firmer foothold in the market, increasing opportunities for diversification and growth, but it is important to remember that normal tax rules apply to gains and losses. Buying and selling cryptos as a direct result of Covid-19 job losses or reduced salaries may also signal a change in intention, and the tax effects of that decision will need to be carefully weighed up.
Herna-Dette van der Zanden from specialist tax consulting firm AJM Tax, says a taxpayer’s intention, both at the stage of purchase and disposal, is the most important factor when determining whether tax will apply at the higher 45% maximum rate for sales as revenue. She explains that SARS sees cryptocurrencies as assets, rather than money or a currency as we know it.
“As assets are frequently disposed, many crypto transactions are susceptible to tax. The key is determining whether that rate is a maximum effective rate for capital gains of 18% for individuals (compared to 45% on revenue gains); or 22.4% for companies (compared to 28%) and trusts at 36% (compared to 45%).”
“Anyone taking the leap into the virtual currency world, should always keep in mind that non-capital amounts are subject to tax at a higher effective rate than capital profits,” says van der Zanden.
While everyone would therefore want their crypto profits classified as capital, the million dollar question is how to convince SARS this is indeed the case.
“You need to consider intention both at purchase and disposal. However, many people acquire cryptocurrencies with mixed intentions (bought partly to sell at a profit and partly to hold as an investment) or they even change their rationale for the purchase later on. The dominant or main purpose is paramount and evidence relating to intention must be tested against the circumstances of each case, which include the frequency of transactions, method of funding and reasons for selling,” explains van der Zanden.
Covid-19 and the undesired consequences such as job-losses is an example of intention changing.
“Where cryptos have been purchased and sold as part of a scheme for profit-making there is no question that gains will be regarded as revenue in nature. An occasional sale of crypto yielding a profit suggests that a person is not a trader engaged in a scheme of profit-making,” says van der Zanden.
However, the “slightest contemplation of a profitable resale” is also not necessarily determinative, but cryptocurrencies sold for a profit very soon after the acquisition is an indication of the potential revenue nature of those profits. “In practice, that measure loses a great deal of its importance when there has been some intervening act, for example a forced sale of the cryptocurrency assets,” says van der Zanden.
Whether Covid-19 can constitute such a forced sale, will therefore have to be individually evaluated with reference to each taxpayer’s purpose and their circumstances.
“Cryptos remain something of an enigma for many investors, as well as a potential tax burden for those hoping to bank fast profits. It is critical investors understand their obligations when they need to declare their crypto profits and losses to the Receiver,” concludes van der Zanden.
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