Taxman coming for Bitcoin

Over the last five
years, South Africa has emerged as one of the world’s most notable cryptocurrency adopters, and an estimated 13% of its internet users owning or using cryptocurrencies.
With the South African Bitcoin/ZAR weekly trading volume currently standing
close to R30million, there are various manners in which the South African
Revenue Service (SARS) can track the gains made by South African taxpayers who
trade cryptocurrencies.

According to
Wiehann Olivier, partner at the audit division of Mazars in South Africa, there
are various techniques SARS could apply for the direct taxing of
cryptocurrencies. Mazars specialises
in audit, accountancy, advisory and tax services.

“To start, the fact
that cryptocurrencies were created to allow for anonymous, frictionless and
trusted peer-to-peer transaction to be conducted over the internet (including
cross-border transactions) means that it can be used as a means of tax
avoidance in a number of different ways,” says Olivier

Investors can store
their cryptocurrencies in paper or hardware wallets instead of relying on a
custodian such as an exchange to safeguard their assets, which makes it
impossible to confiscate these cryptocurrencies and extremely difficult to
track their movements, he says.

“There is also the
option to rely on a series of smoke and mirrors. Different types of
cryptocurrencies can be exchanged for one another and passed through a series
of wallets and public key addresses to attempt to confuse the trading activities
and to evade taxes.”

He points out that
SARS is currently relying on the honesty of South African taxpayers to include
their realised gains on cryptocurrencies as part of their taxable income.

“SARS has not yet
released any specific legislation around the taxation of cryptocurrencies,
besides that taxpayers need to include any realised gains from the trading of
crypto currencies in their taxable income. However, we believe that SARS will
publish new regulations in the coming years to have a more specific focus on
these digital assets. One of these interventions may include introducing
regulations that require all South African cryptocurrency exchanges to share
information with SARS, making it more difficult to apply the above-mentioned
method of avoidance. With that said, it will require SARS to gear itself to
ensure that it can collect on what it is owed.”

There is also the
possibility that offshore cryptocurrency exchanges and banks might have the
same agreement with SARS as foreign institutional investors have, whereby they
share individuals and companies’ trading and asset holding data with revenue
services from various countries. This would again make it more difficult to
avoid paying tax by moving assets out of South Africa.

Olivier advises
that businesses should already begin to prepare for tighter regulation of their
digital assets. 

“Trading companies
should consider acquiring the services of firms that can supply confirmation
and reporting around its clients’ digital currency audits, well before new
regulations are introduced.”

With the
introduction of stricter tax legislation a virtual certainty within the next
few years, Olivier says that preparing for these interventions well ahead of
time may be beneficial for cryptocurrency exchanges, traders and
investors. 

“The regulation of
digital assets in South Africa could even bring exciting business opportunities
for many entrepreneurs and business.”