With the threat of criminal sanctions for non-compliance. From Moneyweb.
Crypto traders have started receiving notices from the South African Revenue Services (Sars) that their tax affairs are being reviewed based on information received from “various crypto asset exchanges”.
Sars also warns that traders’ failure to provide any information requested could be deemed a criminal offence under the Tax Administration Act.
This appears to be part of Sars’s “leave no stone unturned” policy in pursuit of its mandate to collect revenue by whatever means necessary, says Jashwin Baijoo, head of strategic engagement and compliance at Tax Consulting SA.
Read: Sars follows the money
“For years, crypto asset traders have transacted under the misconception that their crypto-related profits fall outside the domain of Sars, and if they don’t tell, how will Sars ever know? Unfortunately for those too busy monitoring bear and bull markets, a pivotal shift has been missed.
“Sars has confirmed that, similarly to how they may demand transactional records from banks, they may very well do the same with crypto asset exchanges.”
Traders should not assume that Sars will not investigate historical non-declaration of crypto ownership at some point in the future, adds Baijoo. This means that even though taxpayers are requested to make full disclosures to Sars on local and foreign crypto transactions, this is more for verification than data-gathering purposes.
No clear guidance
Sars does not have full automatic access to crypto exchange information and must request this information on a case-by-case basis, says Wiehann Olivier, partner and head of fintech and digital assets at Forvis Mazars.
“I am concerned that Sars may be going to great lengths to prosecute non-compliant taxpayers involved in cryptocurrency trading.
“However, if they utilised their efforts to provide taxpayers with clear guidance, it might have a positive effect, as you can catch more flies with honey than with vinegar,” says Olivier.
“To date, Sars has not given taxpayers clear guidance on when a cryptocurrency transaction is deemed capital or income in nature, stating only that the normal rules apply.”
Read: Crypto tax classification – capital gains or income?
Keeping accurate records of gains and losses on local and foreign crypto exchanges is challenging at the best of times, especially where high-volume trades through multiple trading pairs are performed. This requires specialised tools that can track exchange trades through API (application programming interface) integration or on-chain data.
Sars also appears to be using AI to home in on non-compliance, but the extent to which this is up and running remains moot.
The problem with this approach is one that confronts all AI models: the quality of information used to train the models. The data held by Sars and the crypto exchanges must be of a certain quality to identify omissions within tax returns, and getting that right is no short exercise.
Listen: Sars is using AI to track down undeclared crypto profits
“To reprimand taxpayers for non-compliance or under-declaration of taxes, Sars would need the resources and manpower to investigate and engage with the relevant taxpayers,” says Olivier.
“This is where they may fall short and focus on high-net-worth individuals instead.”
When crypto is paired with conventional currency
Another lingering issue is exchange control regulations and monitoring by the SA Reserve Bank, especially when cryptocurrency traders use automated bots to leverage arbitrage opportunities between South African-based exchanges and international exchanges with fiat pairs consisting of sterling, dollars and euros.
“This is a different beast and something nobody is paying attention to,” says Olivier.
Read: Sars’s AI-enhanced audit capabilities wreaking havoc on taxpayers
There is no doubt that Sars will become more proficient in tracking down undeclared crypto profits through a combination of electronic forensic services, AI, and seasoned audit investigators.
That, and the threat of criminal penalties, should start to lasso those who got swept away in the exhilaration of crypto’s supposed privacy and decided not to declare their crypto profits. Those days are clearly coming to an end.
To get a proper grip on the tax implications of crypto transactions, Sars would need access to both local and foreign exchanges.
Further complicating matters are those who store their crypto off-chain (such as on flash drives and highly secure wallets), transact on decentralised exchanges, or use blockchain for payments. Getting this information will no doubt be a long haul for Sars.