Analyses & Studies
Crypto tax risks – voluntary disclosure window closing
Thousands of South Africans who have traded or invested in crypto assets may soon face severe penalties. The South African Revenue Service (SARS) has started issuing letters to individuals suspected of undeclared crypto gains. Experts warn that those who fail to act now risk not only hefty fines but also potential criminal prosecution.
The window for crypto investors and traders to voluntarily regularise their tax affairs is rapidly closing. SARS is strengthening its enforcement capabilities. The Voluntary Disclosure Programme (VDP) presents a final opportunity to get tax affairs in order and report any undeclared crypto gains.
How VDP works
The VDP is a SARS-administered mechanism that allows taxpayers with previously undeclared crypto gains to disclose these gains voluntarily. By doing so, they can avoid severe penalties of up to 200% and potential criminal charges. Interest will still apply. This is a valuable opportunity for anyone with undeclared crypto gains to come clean before SARS takes enforcement action.
Many crypto asset investors and traders may unknowingly be at risk of non-compliance. This is often due to misconceptions about tax obligations and a lack of authoritative guidance on how to treat crypto assets for tax purposes.
Tracking and enforcement capabilities
According to CoinLedger, there are nearly 8 million crypto users in South Africa. Only about 500,000 are declaring the income or capital gains they generate from trading and investing activities.
As blockchain-based digital assets were designed to operate outside the traditional financial system, many people incorrectly believe they don’t need to declare their crypto dealings.
Blockchain transactions are not fully anonymous. They are linked to wallet addresses. With sufficient on- and off-chain data, these addresses can often be tied back to individual taxpayers. Because every transaction is permanently recorded on an immutable public ledger, this creates a powerful tool for revenue authorities such as SARS.
All virtual asset service providers (VASPs) are also regulated in South Africa. This makes it easier for SARS to request and uncover undeclared crypto gains.
SARS has the authority to compel VASPs to share client and transaction data. As these providers increasingly supply granular information to both SARS and the South African Reserve Bank (SARB), tracing transaction patterns and linking fund flows to individual taxpayers becomes significantly easier. Moreover, SARS is bolstering its capabilities with blockchain analytics tools.
It is expected that there will be an escalation in the issuance of non-compliance notices by SARS. SARS has embraced AI to sift through vast amounts of data. This speeds up assessments and helps identify underdeclared or omitted information, including undeclared crypto gains.
It is likely that within the next 24-36 months, SARS will be equipped to deal more effectively with undisclosed crypto asset-related gains. They will also handle vast transactional data sets obtained from VASPs or directly from relevant blockchains.
Taxpayers need to understand that SARS can issue assessments beyond the prescription period where there has been fraud, misrepresentation, or non-disclosure of material facts.
Tax treatment and compliance tips
Regarding the tax treatment applied to crypto assets, SARS generally classifies high-volume trading as gross income. This income is subject to tax at the marginal rate.
Taxpayers will need to convince SARS otherwise when attempting to declare crypto gains as capital gains. Section 9C of the Income Tax Act, which deems gains on qualifying equity shares held for at least three years to be capital in nature, does not apply to crypto assets.
Bitcoin and other cryptocurrencies are not equity shares as defined in the Act. Therefore, the three-year safe-harbour rule in section 9C cannot be used to classify gains as capital.
Taxpayers also need to know what supporting information to submit. The onus is on taxpayers to ensure all information is accurate. SARS can request anything from third-party reports to data dumps of all crypto asset transactions. This can become an onerous and complex exercise without the right expertise. This is particularly true for taxpayers who need to regularise multiple years of activity or have engaged in high-volume trading.
In conclusion
Taxpayers must be forthcoming with information for each year since they started making crypto gains or losses. Any omission may void the VDP process. Reviewing longer periods will require a deeper investigation and may trigger more questions.
Every taxpayer should take proactive steps to get their tax affairs in order. If you have undeclared crypto gains, the VDP offers a critical opportunity to come forward voluntarily, regularise your affairs, and avoid the harsh consequences of enforcement.
With the right guidance and expertise, navigating this process is possible, but waiting too long could prove costly. Now is the time to work with experienced professionals who understand digital assets and have successfully managed numerous VDP cases.
Article supplied by Forvis Mazars is a platinum member of the French South African Chamber of Commerce and Industry (FSACCI).
Disclaimer:
This article is an external contribution and was not produced by the French South African Chamber of Commerce and Industry (FSACCI). The views, opinions, and statements expressed are solely those of the author(s) and do not necessarily represent the views or positions of FSACCI.
