When the 25 year-old son of a family friend called me to ask how SARS will treat the gains he may derive on the Bitcoins he invested his pocket money in over a number of years, I gave him a brief verbal answer thinking the amounts will probably be quite small. However, out of curiosity I later looked into this question a little deeper.
The first Bitcoin was created in 2009 and one bitcoin could be bought for $1 in 2011 (around R7 based on the Rand:US$ exchange rate at the time). By June that year it was $32 (around R224) and the first major price hike occurred in November 2013 when one Bitcoin achieved US$1214 (around R12 500). In late 2017, the price soared to US$ 20000 (around R250 000). Despite rising and falling in between these dates and thereafter, in March this year (2021) the price of one Bitcoin reached $60 000 (around R900 000).
It is thus possible to see how a discerning youngster could have bought 15 Bitcoin in 2011, an ‘investment’ of around R105 of his or her saved up pocket money and, having thought little about it since, could now be holding Bitcoin worth R13 500 000!
The price could crash at any time of course, but if the discerning youngster were to cash out even half of his or her holdings in a scenario like the one I have set out they would be sitting with a pretty big tax bill!
I am certainly not advocating for anyone to ‘invest’ in Bitcoin at his stage, or to cash out if you have any….I will not even pretend to understand what Bitcoin really are, how they work or what the price will be in the future. What I can do, as I did with this young man, is explain what the tax implications may be if you should hold some and decide to sell.
So, the first thing to understand is that, despite the ongoing debate around whether Bitcoin (or other crypto-currencies) are ‘currency’ or not, the South African tax lawmakers have taken a stand to clarify the position for tax purpose. “Crypto assets”, as the income tax legislation refers to them, are considered to be financial instruments i.e ‘assets’ and not currency. This is important, as the tax legislation has specific provisions that deal with currency and the treatment is very different to the treatment of ‘assets’ (the definition of which specifically excludes “currency” except gold and platinum coins).
Now we know what we are dealing with, the next question is: What was your, the investor’s, intention when you invested in Bitcoin? The rules relating for the determination of ‘capital’ – is it held for long term investment purposes? – and ‘revenue’ -is it held as a ‘profit making scheme’/trading purposes? then need to be applied to determine the nature of the holding.
This determination is important as the amount of tax payable on any gains/profits depends on the outcome. Normal income tax rates (up to 45%) will apply if the intention is purely to ‘make a profit’/trade versus if the capital gains tax provisions apply which would, for an individual, subject to the normal income tax rates (up to 45%) only 40% of the gain (after a R40000 tax-free amount) giving a maximum effective rate of 18%. This distinction is thus critical.
Some insight to SARS’ attitude to the profits from the sale of Bitcoin can be seen in a previous version of its Capital Gains Tax Guide, where it made the statement that “Given their extreme volatility, Cryptocurrencies are likely to be held as a speculative asset of a revenue nature.” Interestingly, this comment has been removed in the latest version, perhaps due to the fact that such a sweeping statement can’t be applied to all circumstances.
However, if you have regularly bought and sold Bitcoin over the last while it may be very difficult to argue that you were, or are, holding for long-term investment purposes. If, on the other hand, you bought a while ago and have not had any, or have had few, sale transactions then the argument that you are holding the assets as a ‘store of wealth’, despite the fact that Bitcoin provide no other return than growth may hold. This has been demonstrated in a number of cases relating to KrugerRands, for example. The thing to remember is that the onus will be on you, the taxpayer, to prove your stated intention by being able to demonstrate that the facts support that it.
Unfortunately, the provision in our tax legislation regarding holdings for more than three years being deemed to be capital in nature only applies to equity shares and unit trusts and even then not all of them. Nevertheless, the provision does imply that holdings of more than 3 years are likely to be looked at more favourably than those held for shorter periods. Nevertheless, you wont be able to rely on the time held and will need more evidence to show your intention.
Sales of Bitcoin don’t, of course, always result in a profit. You could end up with a loss. The question then is: Can you offset such a loss against you other income? If you are holding the Bitcoin as capital assets then the loss may be offset against other capital gains you may have.
If, as an individual, you are trading and you have enough taxable income to be taxed at the marginal tax rate (i.e. 45%) you will not be able to offset the loss off against your other taxable income (only against other crypto-asset profits) unless you can prove to SARS that you are operating a genuine trade and that there is a real prospect of ultimately making a profit.
This might currently not be difficult as the price has been increasing but might not be so easy if the price starts on an ongoing downward trend again. The predictions about the future price of Bitcoin are nothing more than predictions and vary widely depending on which article you read. Even if you are able to demonstrate a viable ‘trade’, if you make trading losses on sales of crypto assets in 6 out of 10 years they will be disallowed and may only be available to offset against future crypto asset profits.
What is critical is that you declare your sales (gains and losses) on your tax return as, these days, SARS is very awake to the potential profits that people can make and is asking questions about Bitcoin and other crypto assets in its queries to taxpayers. You don’t want to have any profits you do make taken away in the form of penalties and interest.
Also clear is that, despite Bitcoin having been around now for around 12 years, there is still a lot of debate around cryptocurrencies overall – how they will evolve and their ultimate long-term use. Things could thus change so, if you do plan selling any it would be best to clarify what the tax implications will be and make sure you disclose the outcome in your tax return.