If you hold crypto assets, you need to understand crypto tax — how the South African Revenue Service (SARS) taxes your investments and trades.

SARS has provided some guidance on how it handles the taxation of crypto assets, but many people still make mistakes that can result in penalties or non-compliance.

Christo de Wit, South African country manager of Luno, a licensed financial services provider, explains: “Luno is not a tax advisory service, but we take proactive steps to help our customers learn more about their obligations as crypto asset holders.”

One common misconception is that blockchain transactions are entirely anonymous and that it is possible to evade your tax obligations.

“Most blockchains are public ledger, meaning all transactions are visible and immutable, meaning they cannot be deleted,” explains Wiehann Olivier, fintech and digital asset lead at Forvis Mazars South Africa.

“SARS may engage with exchanges and request transactional data, as well as use  data-matching techniques to trace transactions back to taxpayers. And they can go back further than five years.

“Crypto asset providers are regulated in South Africa and are therefore obligated to provide information requested by regulatory tax authorities, though this does not mean that SARS has open access to your crypto-related assets and transactions.”

Trading versus investing

Another misunderstanding is around taxable events. Many think that only converting crypto to fiat currency (like South African Rand) triggers tax obligations, but SARS considers any disposal of a crypto asset – including trading one crypto asset for another, or using it to purchase goods and services – as a taxable event. Depending on the nature of the transaction, it could be subject to either capital gains tax (CGT) or income tax.

Dale Russel, Director of TrustReserve Solutions Limited and Moore Blockchain and Digital Assets JHB, says that a significant distinction needs to be made between trading and investing in crypto.

“Traders – those who frequently buy and sell crypto for short-term gains – are taxed on their profits as regular income. In contrast, investors holding crypto for long-term growth, are subject to capital gains tax, which is applied at a lower rate than income tax,” he says.

It’s important to highlight that SARS can consider you both a trader and an investor, depending on the nature of your behaviour with crypto assets, and your transactional frequency.

“Let’s say you hold one of your coins as an asset – your intent is to hold that coin for longer-term growth. When you sell it, it may be subject to capital gains tax,” says Jashwin Baijoo, Associate Director and Head of Crypto Asset Compliance at Tax Consulting South Africa.

“But you also hold another coin that you actively trade to take advantage of market movements. On disposal, any profit received on that coin is more akin to income in the eyes of SARS and will be taxed accordingly.”

For example, if someone holds 5 ETH, with 3 ETH staked and untouched, the original staked amount may be seen as capital and therefore be subject to CGT when eventually sold. The rewards generated from staking, however, are treated as regular income, since the rewards are paid out periodically to the wallet and would be taxed accordingly as income.

On the other hand, if the remaining 2 ETH are used for frequent trading activities, the profits from these trades would be classified as income and taxed as such.

Record-keeping is vital

Proper record-keeping is crucial when dealing with crypto tax. SARS requires detailed records of transactions, including acquisition and disposal dates, amounts, and transaction types, to be kept for at least five years. These records are essential for accurate tax reporting, and failure to maintain them can lead to discrepancies during tax assessments.

Many people also overlook the tax implications of earning crypto through activities like mining, staking, or airdrops. Any crypto earned in these ways is considered income at the time of receipt and is taxed accordingly, based on its fair market value in ZAR. Later disposals may lead to additional tax liabilities if the asset’s value changes.

While capital losses could be offset, you could land in hot water if this is incorrectly applied. You need to be tactical about your approach to tax and should seek specialised advice.

“Luno provides downloadable statements to assist users in tracking their crypto activity for tax purposes,” says de Wit.

“It is encouraging and a step in the right direction that SARS is working on guidance for crypto tax, even though this has not yet been bedded down. We encourage users to consult a tax professional who understands the complexities of crypto assets taxation to ensure accurate reporting.”

He concludes: “With the right knowledge, you can stay on top of your tax obligations, so we encourage our customers to consult with a knowledgeable partner.”

This post was based on a press release issued on behalf of Luno.