Crypto Traders Under SARS Scrutiny for Tax Compliance
You can also listen to this podcast on iono.fm here.
JEREMY MAGGS: I’ve come across reports indicating that cryptocurrency is quickly losing one of its historical advantages for taxpayers. What am I referring to? The diminishing level of anonymity.
As of March this year, South Africa’s new crypto asset reporting framework mandates that crypto service providers gather comprehensive transaction information for the South African Revenue Service (Sars), which includes details about purchases, disposals, and transfers between wallets.
The significant question for companies is shifting from whether Sars can access the crypto data to how they can substantiate their reporting of it.
With me now is Mohammed Mayet, director and head of tax at HLB CBS Group South Africa. Thank you for joining us, Mohammed.
Is this genuinely a crackdown on crypto taxation, or is Sars simply enhancing its ability to monitor transactions that were always taxable?
MOHAMMED MAYET: Thank you for the opportunity, Jeremy, and greetings to your listeners.
This is a crucial question. It represents a balancing act between Sars intensifying its scrutiny of crypto trades and the long-standing reality that the revenue authority recognizes a potential revenue source where taxpayers in South Africa have not accurately accounted for their crypto transactions on their tax returns.
Thus, it’s a combination of both factors.
JEREMY MAGGS: Do you believe that the use of crypto is spreading more significantly in this context?
MOHAMMED MAYET: Yes, current data indicates approximately six million South Africans, regardless of tax registration status, are engaged in the crypto space. From a revenue authority standpoint, one might wonder if these six million individuals are making profits or losses, or if they are trading on international platforms, and whether Sars is collecting the taxes owed.
ADVERTISEMENT
CONTINUE READING BELOW
From that perspective, it is a broader concern regarding the revenue flows to the authority, which believes there are crypto taxes owed to us by this population trading in cryptocurrencies across South Africa.
JEREMY MAGGS: The framework requires service providers to report transactions to Sars. How much more oversight does Sars have now compared to before?
MOHAMMED MAYET: Previously, there was little visibility. As data emerged showing countless South Africans engaging in crypto trading, the reporting framework from a South African perspective was strengthened.
This reporting framework necessitates two key aspects:
First, it mandates the reporting of specific information, which includes user details, platform information, and the number of trades. This finer detail now provides the intelligence Sars needs. Sars can subsequently perform data mining and cross-reference with individual or business tax returns to determine whether a taxpayer has engaged in crypto trading on these platforms.
Essentially, they can assess the volume of trading and inquire about declarations. Have you achieved a profit? Have you incurred a loss? Regardless of the situation.
As such, data integrity is becoming increasingly vital in this determination. The reporting framework has indeed seen significant enhancements.
JEREMY MAGGS: Does utilizing an offshore exchange or transferring crypto to a private wallet provide taxpayers with any significant form of anonymity?
MOHAMMED MAYET: Generally, whether you transfer to a private wallet or an offshore platform, your trading account remains visible, with each user assigned a unique password, account, and summary of their trades.
For instance, if you are trading from Singapore, Hong Kong, or the US, you are still connected to an account. Whether that account is divided into private wallets or not, you still have a trade summary.
This trade summary plays a pivotal role in determining your activities.
These activities are crucial for the data integration process. The more information I have from these platforms, as the revenue authority, the better I can assess where you are trading, how you are trading, and which platforms you are utilizing domestically or internationally.
ADVERTISEMENT:
CONTINUE READING BELOW
To answer your question, it is an integrated approach to obtaining a comprehensive overview of a taxpayer’s activities.
JEREMY MAGGS: In this context, the major concern seems to be one of classification. Why is it so challenging to determine whether a gain is classified as capital or revenue?
MOHAMMED MAYET: Historically and moving forward, the distinction between capital and revenue will always be a point of contention.
Numerous court cases have explored the capital versus revenue argument, and it’s a prevalent consideration for both Sars and taxpayers debating whether they belong in the capital or revenue category.
Several factors influence this classification. One significant difference I can point out to our audience is this: if I am a doctor managing a practice and I choose to explore crypto for investment, hoping to secure a long-term benefit for my family, I might invest $1,000 for several years. My primary income is from my practice, while this investment represents a potential future gain, leaning more towards the capital side.
Conversely, if I were doing nothing else and trading crypto every day to pay my bills, that would classify me within the revenue category.
This simplified example illustrates the complexities of capital versus revenue classification. As we delve deeper, it can become more intricate, but this gives a clear picture of the ongoing debate.
JEREMY MAGGS: Thank you, Mohammed Mayet, director and head of tax at HLB CBS Group South Africa. I appreciate your insights today.