Why your intention matters when buying and selling cryptos
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Herna-Dette van der Zanden
CRYPTO assets are gaining a firmer foothold in the market, increasing opportunities for diversification and growth, but it is important to remember that normal tax rules apply to gains and losses.
Buying and selling cryptos as a result of Covid-19 job losses or reduced salaries may also signal a change in intention, and the tax effects of the decision will need to be weighed up.
A taxpayer’s intention, at the stages of purchase and disposal, is the most important factor when determining whether tax will apply at the higher 45 percent maximum rate for sales as revenue. The SA Revenue Service (Sars) sees crypto-currencies as assets, rather than money or a currency as we know it. As assets are frequently disposed, many crypto transactions are susceptible to tax.
The key is determining whether that rate is a maximum effective rate for capital gains of 18 percent for individuals (compared to 45 percent on revenue gains); or 22.4 percent for companies (compared to 28 percent) and trusts at 36 percent (compared to 45 percent). Anyone taking the leap into the virtual currency world, should always keep in mind that non-capital amounts are subject to tax at a higher effective rate than capital profits.
While everyone would therefore want their crypto profits classified as capital, the million dollar question is how to convince Sars this is indeed the case.
You need to consider intention at purchase and disposal. However, many people acquire cryptocurrencies with mixed intentions (bought partly to sell at a profit and partly to hold as an investment) or they even change their rationale for the purchase later on.
The main purpose is paramount and evidence relating to intention must be tested against the circumstances of each case, which include the frequency of transactions, method of funding and reasons for selling.
Covid-19 and the undesired consequences such as job losses are examples of intention changing.
Where cryptos have been purchased and sold as part of a scheme for profit-making there is no question that gains will be regarded as revenue.
An occasional sale of crypto yielding a profit suggests that a person is not a trader engaged in a scheme of profit-making.
However, the slightest contemplation of a profitable resale is also not necessarily determinative, but cryptocurrencies sold for a profit very soon after the acquisition is an indication of the potential revenue nature of the profits. In practice, that measure loses a great deal of its importance when there has been some intervening act, for example a forced sale of the cryptocurrency assets.
Whether Covid-19 can constitute such a forced sale will, therefore, have to be individually evaluated with reference to each taxpayer’s purpose and their circumstances.
Cryptos remain something of an enigma for many investors, as well as a potential tax burden for those hoping to bank fast profits. It is critical investors understand their obligations when they need to declare their crypto profits and losses to Sars.
Herna-Dette van der Zanden is a junior associate at specialist tax consulting firm AJM Tax.
*The views expressed here are not necessarily those of IOL or of title sites.