The South African Revenue Service cracks down on crypto assets

South Africa is following in the footsteps of 50 other jurisdictions in the world of cryptographic assets. On 10 November 2023, the South African Revenue Services (“SARS”) announced in a Media Release that they will be adopting a new Crypto-Asset Reporting Framework (“CARF”) with the intention of facilitating global tax transparency. The OECD first developed the CARF framework, which SARS intends to adopt and implement into South African domestic law. The goal is to kick off information exchanges by 2027, subject to the standard national legislative processes. So, get ready for a new era of transparency regarding crypto in South Africa’s tax landscape.

As per the SARS website, a crypto asset is a digital manifestation of value that lacks issuance by a central bank.  This is basically an asset that is electronically traded, transferred, and stored.  Such assets are generally used to facilitate payments and the underlying technology employs cryptographic techniques to ensure security and integrity.

Firstly, crypto assets are included in the definition of “financial instrument” under the Income Tax Act 58 of 1962 (“the Act”).  Secondly, the disposal of crypto assets is a taxable event. The Act does not provide specific rules pertaining to crypto assets, so therefore they would be subject to the usual income tax rules for financial instruments. Thus profits or gains from selling or realising crypto assets can be subject to taxation as either income or capital, following the same income tax regulations applicable to the sale of financial instruments.

Uncertainty arises when determining whether the profits or gains from these assets are capital or revenue in nature. The taxpayer’s intent, substantiated by objective factors like the duration of holding and the frequency of trades, dictates whether the gains from crypto assets are categorised as revenue, subject to a maximum tax rate of 45%, or as capital, with a maximum tax rate of 18%. Case law sets out that a relevant question is whether the taxpayer was engaged in a scheme of profit making, i.e. was the asset disposed of for the purpose of generating revenue?

To clear the fog a bit, SARS has set out three circumstances in which crypto assets may attract certain tax consequences, namely the exchange of local currency for a crypto asset, goods or services being exchanged for crypto assets, and mining. Broadly, the tests generally used are:

• Where you acquired the crypto assets with the intention of actively trading with them, this points to revenue;
• Where the crypto asset was held as a long-term investment, this points towards capital;
• Where the asset was held for a period of time, this would generally point towards capital.

The CARF establishes a standardised process for automatically sharing tax information on transactions involving crypto assets with the taxpayers’ jurisdictions of residence each year. In a general sense, the CARF comprises regulations and explanatory notes that can be adopted into local legislation. This adoption enables the gathering of information from Reporting Crypto-Asset Service Providers who have a significant connection to the jurisdiction implementing the CARF.

The CARF is structured around four pivotal components: firstly, it outlines the inclusion criteria for crypto assets. Subsequently, it designates specific individuals and entities as central figures responsible for data collection and reporting. Thirdly, the focus is on transactions, identifying those requiring reporting and specifying the information to accompany such reports. Finally, the framework incorporates due diligence procedures where crypto asset users and controlling persons are identified and the relevant tax jurisdictions for reporting and exchange purposes are determined.

South Africa is showing it’s definitely going to tax crypto and adopting this framework into its laws shows that SARS is focussing on this area.  So if you have crypto assets with a link to South Africa, contact us today.