The crypto market has seen a bull-run for a considerable portion of 2021 attracting investors en masse. The tide has however turned, resulting in markets experiencing a 50 to 60% slump in prices from the heights of the crypto currency boom. This has left many high-risk investors deflated, with many realising significant financial losses in recent months, and raising a relatively new question: Will the South African Revenue Service grant any relief for crypto currency losses incurred?
Crypto currency has been defined as an asset for South African Tax purposes, not a currency, which implies there will be a tax consequence as soon as you dispose of your crypto asset for fiat currency, or exchange it between platforms for example Bitcoin to Ethereum, Litecoin etc.
An important distinction that has to be made though, is whether the income or losses generated by your crypto assets are revenue or capital in nature. Revenue is taxed at the higher marginal rates for individuals (or 28% for companies), while capital is taxed at the lower 18% effective rate for individuals (22.4% effective rate for companies).
The nature of crypto income or losses will be determined by the specific circumstances of each case, and normal trading principles will apply i.e. the intention when the shares were purchased and disposed of, will be important. If, for example it was purchased as a long-term investment to realise capital growth, it can be argued to be capital in nature. However, if the asset was acquired for the purpose of short-term speculative reselling at a profit and thereby assumed the character of trading stock, then the sale will be deemed to be revenue in nature and taxed at the higher marginal or company tax rates. Given crypto assets’ extreme volatility, it is often held speculatively which means that, more often than not, it will be taxed at the higher marginal or company tax rates. High trading volumes might also suggest trading and therefore revenue in nature.
Revenue in nature
If crypto asset gains or losses have been classified as revenue in nature, then normal trading loss rules will apply i.e. crypto asset losses incurred can be deducted from taxable income in accordance with Section 20 (Assessed losses) and Section 20A (Ring-fencing of assessed losses) of the South African Income Tax Act.
Crypto asset purchases and disposals fall within the SA Income Tax Act definition of a ‘trade’. Section 20 requires us to calculate a ‘taxable income’ and ‘assessed loss’ for each trade separately and add all the different trades together to arrive at a total taxable income or assessed loss for the year of assessment. Section 20(1)(b) of the South African Income Tax Act states that any assessed loss incurred from a trade carried on outside the Republic, shall not be set off against any amount derived from a source within the Republic. The South African Institute of Tax’s current position is however that crypto trading activities are located where the taxpayer applies his/her wits and labour (ITC 1779 (2004) 66 SATC 353 (C)). This means that in most cases South African based crypto investors (individuals, companies or trusts) should be able to define their crypto losses as local trading, to be offset against any local or foreign trading taxable income.
Section 20(A)'s ring-fencing of crypto currency gains and losses might however apply to individuals who are on the maximum marginal rate of tax, which means that their crypto losses might only be available for offset against future crypto gains and not any other taxable trades. It should be noted that the acquisition or disposal of crypto assets has been listed as a ‘suspect trade’ within the SA Income Tax Act. Accordingly, any ring-fencing of crypto losses will apply to individuals at the maximum marginal rate of tax unless there is a reasonable prospect of deriving taxable income from the crypto trade within a reasonable period, in which case the ring-fencing falls away. If this individual incurred a crypto loss in at least 6 of the last 10 years of assessments, the crypto loss will automatically be ring-fenced to crypto gains only.
Section 20(A) however does not apply to companies or trusts i.e. if crypto assets were for example bought in the name of a South African trust or company, you would be able to utilise the trading losses against any other taxable income in the trust or company in the current year of assessment. Assessed losses not utilised against taxable income in the current year of assessment, will be rolled forward for utilisation against future taxable income (subject to the proposed Section 20 amendments with effect from the 2023/2024 financial year).
Capital in nature
If crypto asset gains or losses have been classified as capital in nature, paragraph 4 of the Eighth Schedule will apply. The Eighth Schedule is generally not concerned with the source of a capital gain or loss and paragraph 39 ring-fencing (between connected parties) is unlikely to be applicable, which effectively means that crypto asset capital losses can be utilised against any other capital gains immediately. Capital losses not utilised against capital gains in the current year of assessment will be rolled forward for utilisation against future capital gains.
In summary, in most cases your crypto losses, whether revenue or capital in nature can be utilised against taxable income or capital gains. Individuals at the highest marginal tax rates may however have to ring-fence their crypto losses to crypto gains only, unless the escape clause can be argued in the specific facts and circumstances. In light of the above I would strongly recommend notifying your accountant of any realised crypto losses during the recent financial year or get in touch with our specialised tax and accounting team so we can assist you to receive all the tax benefits available and help minimise some of the crypto losses you may have suffered.
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