CRYPTOCURRENCY: Are there any prospects of fattening the tax purse or is it just a drop in the ocean?

The rise and rise of crypto assets

For more than a decade, crypto asset adoption has grown exponentially the world over, with South Africa being no exception. Indeed, the Financial Sector Conduct Authority (FSCA) estimates that 43% of the South African population will use crypto assets by 2030.

Of course, while crypto assets have been around for some time, so have the challenges they pose for tax administrations such as SARS. The digital, intangible nature of crypto assets has infamously made it easier for taxpayers to understate their crypto asset trading gains, if not evade tax on them entirely, which is evidently not lost on SARS.

SARS’ position on crypto assets

In April 2018, SARS released a statement on the tax treatment of crypto assets. It came as no surprise that its position was - to put it plainly - vanilla. Crypto assets are regarded as assets as opposed to any form of currency and gains or losses would be subject to either normal income tax or capital gains tax, depending on the nature of the transaction, the overall facts and circumstances present and the taxpayer’s intention. 

Not unexpectedly, the April 2018 statement by SARS was a long way off from providing perfect clarity; however, it did communicate one essential thing—there would be no artificial tax holidays for errant crypto traders.

Still, much to the chagrin of compliant taxpayers and tax practitioners preaching about the importance of remaining compliant, it seemed at the time that not much was really being done. From a regulatory perspective, this was something that could not be ignored and yet, progress was slow.

Recently, however, the media has increasingly been abuzz with hot takes from various pundits and, perhaps most notably, the Commissioner Kieswetter himself. On 9 October 2024, SARS issued another statement on crypto assets, stating that it is “concerned that these crypto assets and trades are not being declared on the tax returns of taxpayers” and “SARS will be including crypto assets into its compliance programmes”, repeating its strategic objective to make willful non-compliance hard and costly for taxpayers.

Strengthening compliance through enforcement.

With SARS having broadly publicised its focus on crypto asset tax compliance, tax practitioners who regularly deal with these issues still see a widely held perception among crypto traders that SARS does not have the ability to adequately investigate these matters and, even then, that SARS has no teeth. This could not be further from the truth.

Back in 2022, SARS had requested taxpayer information from 12 crypto asset service providers in South Africa. At the time, many did not know that SARS could do this. However, it was empowered to do so, in terms of section 46 of the Tax Administration Act, No. 28 of 2011.

Today, it is apparent that SARS has not stopped adding measures to its crypto tax compliance toolkit. It has been doing so by “increasing capability in its audit teams to support enforcement initiatives”, as well as resorting to greater use of artificial intelligence, machine learning and algorithms to process its work. Regarding crypto assets held offshore, SARS is also able to exchange information with other tax authorities. It will soon do so automatically by way of a Crypto Asset Reporting Framework developed by the Organisation for Economic Cooperation and Development (OECD) by 2027.

Earlier this year, SARS directed query letters to certain taxpayers, confirming that the taxpayer has been identified as having potentially engaged in trades and may have omitted to correctly disclose this in their returns. For all intents and purposes, a warning shot – something that would precede an audit.

Keeping in mind that SARS is not bound by any arbitrary statute of limitations as concerns evasion, the walls are quickly closing in on non-compliant crypto traders. Put simply, the canary in the coal mine is dead.

Tax revenue: gold mine or a drop in the ocean?

While SARS’ efforts in this area are commendable, the question remains as to whether these measures will result in substantial revenue for the fiscus. Is the juice worth the squeeze?

While sources for information on crypto asset trading adoption rates by country tend to be dubious at best, South Africa is generally seen as one of the highest adopters among African nations. The FSCA has previously stated that in January 2021, daily crypto asset trading values in South Africa exceeded R2 billion for the first time. This would predictably be much, much higher by today. Recently, South African crypto asset service providers have reported a massive increase in trading volumes following the United States elections— by between 200% and 400% in some cases. Of course, with this borne in mind, perhaps it also serves to mention that the local crypto asset market remains relatively small as compared to the more traditional asset classes; so, any tax revenue from crypto asset transactions would remain modest for some time to come. Further, given the notorious volatility of crypto assets, this would not foreseeably be a consistent source of tax revenue.

So, no. Crypto assets are not a gold mine in the traditional metaphorical sense of the term. Certainly, whether it is worthwhile for SARS to continue its efforts in this area will depend on a raft of factors, not the least being the cost-benefit extent of resources it requires from SARS to ensure compliance.

It does not matter whether you are speeding in a Suzuki or a Ferrari, you are still committing a crime. The same goes for the driving instructor without a driving license—for tax practitioners who take a non-technical, incorrect approach to crypto asset tax compliance, perhaps now is the time to consult the experts.

Article by Thomas Lobban - Director of Ibex Consulting, A Division of Latita Africa.