What is the Tax Law on Cryptocurrency (Bitcoin) Profits?
The internet has been abuzz recently with news of cryptocurrency. The fact that it’s a relatively new form of currency that goes hand in hand with the modern digital age is enough to scare away most investors, couple this fact with its fluctuating value and you can see why only the most adventurous traders concern themselves with things like Bitcoin. But having such a volatile market price isn’t always a bad thing, some savvy marketers take advantage of this fact by buying low and selling high and occasionally making huge profits. But how do taxes work in these scenarios? Is cryptocurrency taxed differently and what are the average rates? What is the Tax Law on Cryptocurrency (Bitcoin) Profits?
On the 6th of April 2018, SARS released a statement pointing out that they would continue to tax cryptocurrency gains and losses using normal income tax rules. This means that all cryptocurrency-related taxable income must be declared by taxpayers as usual lest they incur interest and/or penalties.
Put simply, profits and losses made through cryptocurrency should be treated similarly to profits and losses made when dealing with capital assets such as properties or stocks. In other words, money made from cryptocurrency will be taxed either by a capital gains tax or by your standard marginal tax rate depending on the individual circumstance.
How much Tax do you Pay on Cryptocurrency in South Africa?
As mentioned, when working out your payable tax for cryptocurrency, your crypto assets should be treated like normal stocks. What this means is that, depending on the nature of your investment, any profits will be taxed as either capital gains or revenue gains.
- Revenue Gains – Crypto held as a kind of trading stock, that is to say, held for the main purpose of a profitable resale, will be subject to a standard income tax at your marginal rate. Generally, this means that individuals who buy and sell crypto over a relatively short term (for example, within a couple of months) will have their gains treated as a type of revenue. This tax could range between 18-45%*.
- Capital Gains – When dealing with capital assets (long-term dividend-producing investments), an individual will usually hold their stock, or in this case, their crypto, for a much longer period of time and a subsequent sale will be subject to a capital gains tax. This tax is normally at a lower rate than a standard income tax and your effective CGT rate could range between 18-36%*.
As you can see, the classification of your crypto-assets will heavily influence the way in which they are taxed with the main distinction being made between traders and long-term investors.
Is Cryptocurrency Trading Legal in South Africa?
Yes, it is legal to buy and sell crypto in South Africa.
Does South Africa Recognise Cryptocurrency as an Official Currency?
Cryptocurrency is not an officially recognised tender in South Africa and is instead treated as an intangible asset by SARS. While some businesses do legally accept it as payment, this practice is not common throughout the country.
Why do Companies Refuse to Accept Cryptocurrency as Payment?
While many people see crypto as the way of the future, others are a bit timider and many companies have yet to accept crypto as a valid form of payment. But why is this the case?
- Volatility – The first and perhaps most sensible objection to crypto lies with its inherent instability. A quick look at the price history for Bitcoin shows overall growth coupled with enough price drops to turn your hair grey. Most companies are risk-averse and simply don’t want to worry about whether or not the tender they receive is going half its value overnight.
- Uncommon – Despite making big waves in the news cycles, crypto, in general, is nowhere near as commonly used as other, more conventional means of currency. While many fans may think that there’s a huge demand for the crypto-accepting marketplace, the truth is, few people are actually demanding that this alternative be made available, and as such, few businesses are willing to risk changing their ways just to satisfy such a tiny proportion of their customer base.
- Unknown – Regardless of how safe or stable something actually is, if it is perceived as dangerous or confusing most people will avoid it, crypto is no exception. Many people believe that they can spot a fake banknote or they at least trust in the authenticity of the bank, crypto, on the other hand, is largely unregulated by banks and governments and is often seen as susceptible to hacking and scamming, as such, many businesses will avoid it until it seems more reliable.
All things considered, we’ll have to wait and see what the future holds for crypto in general, but you can rest assured that if it grows in popularity, more and more businesses and even countries will begin to accept it as legal tender out of sheer necessity.
What is Blockchain? – What is the Tax Law on Cryptocurrency Profits?
Blockchain can most easily be understood as a type of digital ledger for crypto transactions to ensure that things like fraud or double-spending don’t take place. Simply put, blockchain is a type of giant database for crypto transactions, information is stored in large groups (blocks) which are then connected with other blocks (chained). Hopefully, at this point, you can understand where the name comes from.
By recording and confirming all transactions, these blockchains ensure, for example, that the same bitcoin is not spent twice or copied before being spent. But who collects and verifies all this data?
What is Bitcoin Mining? – What is the Tax Law on Cryptocurrency Profits?
If you watch enough news, you’ll no doubt have heard of bitcoin miners making stacks of cash while sipping on a coffee at an internet cafe. At times, the coverage is so confusing, it may even leave viewers wondering if there’s a giant bitcoin mine somewhere that you can go visit and watch men in hardhats pull giant clumps of bitcoin out the ground. In reality, the work is far more complex and far less rewarding.
A bitcoin miner is almost like a kind of online bookkeeper who works to create and verify the aforementioned blockchains. If you find yourself with a powerful enough computer and the required tech skills, you can begin working through and authenticating these various transactions. This process is extremely important as it ensures the validity of the cryptocurrency.
Surprisingly, these miners don’t do all this work out of the goodness of their hearts and are instead paid, in bitcoin, for every block that they complete. As more transactions take place, the required processing power increases exponentially and the role of bitcoin mining has begun to shift from individuals working on their laptops to owners of massive bitcoin farms which consist of rows upon rows of constantly running, mining hardware.
In Conclusion – What is the Tax Law on Cryptocurrency Profits?
While cryptocurrency is not viewed as a legal tender in South Africa, it is classified as a type of intangible asset by SARS for tax purposes, what this means is that any profits made through the sale of crypto in South Africa will be treated identically to the sale of other, more common stocks.
These assets are subject to either a Capital Gains Tax or to your standard Marginal Tax Rate, with a differentiation being made depending on the nature of the asset. If, for example, your crypto is being held long-term as a dividend-producing investment, it will usually be subject to a capital gains tax when sold.
On the other hand, if your crypto is held in the short-term for the main purpose of reselling at a profit (ie, if you are a type of crypto-trader), profits will be viewed as a type of revenue gain and will be subject to a standard income tax.
It is, however, important to remember that various exclusions and exemptions exist which may effectively lower your tax rate to 0% and, as such, it is highly advisable that you consult an expert to ensure that you are paying the correct amount.
While it is legal to buy and sell cryptocurrency in South Africa, it is not commonly used or accepted by most outlets. Transactions are verified online via a system of complex digital ledgers called blockchains. These verifications are completed by cryptocurrency miners who are then paid in said cryptocurrency.
Disclaimer LAW101: All of our posts are for research purposes only. Law 101 aims to assist its readers with useful information on the laws of our country that can guide you to make decisions in line with the South African Governmental Laws currently in place. Although our posts cite the constitution in many instances, they are intended to assist readers who are looking to expand their knowledge of the law. Should you require specific legal advice we advise you to get in touch with a qualified legal expert.
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