The South African Revenue Service (SARS) has significantly escalated its efforts to enhance tax compliance in the crypto sector, and traders must remain compliant to avoid severe penalties and legal repercussions.
According to legal experts at Webber Wentzel, recent developments have seen the SARS turn its attention toward crypto traders, who are now receiving notices that their tax affairs are under review.
“These notifications are based on information obtained from various crypto asset exchanges, signalling a significant escalation in SARS’s efforts to enforce tax compliance within the burgeoning crypto sector,” they said.
“Following South Africa’s move to regulate financial service providers who provide financial services related to crypto assets, licensed crypto-asset exchanges are now required to provide certain information to regulators.”
They said SARS had warned traders that failure to provide requested information could be deemed a criminal offence under the Tax Administration Act.
“This move underscores the tax authority’s ‘leave no stone unturned’ policy in its pursuit of revenue collection by any means necessary, and taxable profits from crypto trading are no exception,” they said.
SARS is leveraging artificial intelligence (AI) technology to aid its crackdown on non-compliance.
“However, the full extent of AI’s implementation in identifying non-compliant crypto traders remains uncertain,” the experts said.
“This innovative approach reflects SARS’ commitment to modernising its enforcement mechanisms to address the complexities of digital asset trading.”
They said the South African Reserve Bank (SARB) has also clarified its stance, particularly concerning exchange control regulations.
The SARB has explained that neither the Currency and Exchanges Manual for Authorised Dealers nor the Currency and Exchanges Manual for Authorised Dealers in foreign exchange with limited authority allow for cross-border or foreign exchange transfers for the explicit purpose of purchasing crypto assets.
From an exchange control perspective, the Financial Surveillance Department is unable to approve any transactions of this nature.
However, the SARB allows individuals to use their single discretionary or foreign capital allowance to acquire crypto assets.
“This provides a legal pathway for South Africans to invest in cryptocurrencies within the boundaries of existing financial regulations. However, the Foreign Direct Investment dispensation does not permit investments in crypto assets,” they said.
“While this provides some clarity for natural persons, the position of juristic entities remains challenging.”
They said increased scrutiny from SARS, coupled with the SARB’s regulatory stance, signals a new era of accountability and transparency for crypto traders in South Africa.
“Those engaged in crypto trading must now navigate a more complex regulatory landscape, ensuring they remain compliant to avoid severe penalties and legal repercussions,” they wanted.
“The era of flying under the radar is swiftly coming to an end, and traders must adapt to these regulatory changes to safeguard their financial interests.”
Unclear regulations
Despite the surge in cryptocurrency service providers in South Africa, tax implications for crypto traders remain unclear.
The Financial Sector Conduct Authority has recently approved the licenses of 63 more providers, bringing the total to 138.
While this is a positive step for the country’s financial sector, it highlights the need for clearer tax regulations.
Senior tax and legal associate Thomas Lobban at Latita Africa recently expressed concern about the lack of clarity surrounding crypto taxation in South Africa.
He criticized the government’s approach of focusing on enforcement before providing clear guidelines.
Lobban noted that the current tax laws, which treat crypto as a digital asset, are insufficient to address the complex nature of crypto transactions.
One of the major challenges is determining the tax status of a crypto asset. Whether a short-term or long-term holding is considered income or capital gains depends on various factors.
In addition, the use of leverage and interest earned in crypto further complicates the tax landscape.
Lobban also highlighted the limitations of existing tools for calculating crypto profits and losses.
He explained that even seemingly simple transactions, like exchanging Bitcoin for an NFT and then back to Bitcoin, can trigger tax implications.
To address these issues, Lobban called for greater clarity and certainty in the tax laws applicable to crypto assets.
He urged SARS and the National Treasury to provide more specific guidance on how different types of crypto transactions will be taxed.
