Written by: TaxDAO
1 Introduction
The Republic of South Africa (English: The Republic of South Africa), referred to as "South Africa", is located at the southernmost tip of the African continent. It is the second largest economy in Africa and a middle-income developing country. It is also the most developed and industrialized country in Africa. South Africa has a relatively complete financial and legal system, and has good infrastructure such as communications, transportation, and energy. In recent years, South Africa has made many developments in the characterization of crypto assets and industry licenses. The South African Revenue Service (SARS) has gradually clarified the characterization and tax policies of crypto assets. Crypto assets are regarded as "assets of an intangible nature" in South Africa, rather than currency or physical property, so they are unique in tax treatment. This article will analyze South Africa's crypto asset-related systems from the aspects of South Africa's characterization of crypto assets, basic tax system, crypto asset tax system, crypto asset regulatory policy, summary and outlook, and predict its future development direction.
2. South Africa’s characterization of crypto assets
SARS considers crypto assets to be digital representations of value that are transmitted and stored electronically, are not issued by the central bank, and are traded, transferred and stored electronically by natural and legal persons for payment, investment and other forms of intangible assets. The Intergovernmental Fintech Working Group (IFWG) reiterated that although crypto assets have the same functions as currency, they are not "currency" in the sense of legal tender. At the same time, according to the Explanatory Memorandum of the Tax Amendment Bill issued on January 20, 2021, in accordance with the proposal to adopt a unified definition of crypto assets within the South African regulatory framework, the term "cryptocurrency" was replaced with "crypto assets".
3. Overview of South Africa’s basic tax system
3.1 South African tax system
Taxation is the main source of fiscal revenue for South Africa. According to the South African Constitution, South Africa implements a three-level government tax system, namely the national government, provincial government and local government. The national government is mainly responsible for collecting major taxes across the country, such as income tax and value-added tax. Provincial and local governments also have the power to levy taxes, but their tax types and tax bases are relatively limited.
South Africa's tax system is mainly based on income tax and value-added tax, supplemented by other taxes, including capital gains tax, corporate tax, consumption tax, etc.
3.1.1 Income tax
South Africa's income tax system applies to both individuals and companies at progressive rates. Individual income tax rates range from 18% to 45%, depending on income level; the highest rate of 45% applies to annual income above R1,657,000. The standard rate for corporate income tax is 27%. South African residents are taxed on their worldwide income, while non-residents are taxed only on South African-source income. For companies, South Africa applies a worldwide taxation principle, meaning that all income earned in and outside South Africa is taxable. Taxpayers are required to file an income tax return annually and make advance payments based on their income. Certain expenses and donations can be deducted from the calculation of taxable income, thus reducing the tax burden.
3.1.2 Capital Gains Tax
Capital gains tax in South Africa is a tax levied on the profit arising from the sale or disposal of capital assets. Profits are the net increase in value after deducting the cost of acquiring the asset and other related expenses from the sale price. It applies to individuals, companies and trusts and covers a wide range of asset types. The effective tax rate is up to 18% for individuals, 22.4% for companies and 36% for trusts. Individuals are taxed on their worldwide capital gains, while non-residents are taxed only on capital gains arising in South Africa. Taxable assets include real estate, shares, precious metals, works of art, business and investment assets and cryptocurrencies. Individuals are exempt from capital gains tax on the first R40,000 per year, while capital gains on the first R2 million from the sale of a principal residence are tax-free. Taxpayers are required to declare their capital gains in their annual income tax return and pay tax on the amount declared.
3.1.3 Value Added Tax
South Africa's VAT is a tax on the value added of goods and services. It applies to almost all goods sold and services provided in South Africa. South Africa's VAT system is based on the Value Added Tax Act. The standard rate is 15% and applies to most goods and services, including imported and exported goods. Zero tax applies to exported goods, basic food and some medical services, while financial services, educational services and public transportation are completely tax-free. VAT calculation is based on the difference between output tax and input tax. If the output tax is greater than the input tax, the company must pay the difference; otherwise, the company can apply for a refund. The tax declaration cycle is usually monthly or bimonthly, depending on the company's annual turnover. Companies are required to declare through the electronic system provided by SARS and pay taxes before the deadline. SARS ensures compliance through regular audits and information sharing, and imposes penalties and interest on companies that fail to declare or pay truthfully.
4. Tax policies applicable to crypto assets in South Africa
South Africa's tax policy on crypto assets has gradually improved, covering personal and corporate income tax, value-added tax and capital gains tax. SARS has been studying crypto assets since 2014 and announced in 2018 that normal income tax rules would apply to cryptocurrencies, requiring taxpayers to declare all taxable income related to cryptocurrencies. Taxpayers who fail to declare truthfully will face interest and penalties. In 2021, SARS strengthened taxation measures on crypto transactions and required cryptocurrency exchanges in South Africa to provide transaction information to ensure tax compliance. The Income Tax Act sets out the broad powers of SARS. Under the Income Tax Act, SARS has many taxation powers and requires third-party service providers to disclose financial information and submit financial data locally and internationally.
As mentioned above, SARS defines crypto assets as intangible assets and taxes the gains from holding and trading them. Gains from the sale or trading of crypto assets by individuals are considered taxable income, with ordinary income tax rates for short-term holdings and capital gains tax for long-term holdings. Companies are required to report their gains or losses from crypto asset transactions in their annual income tax returns, and the relevant income is included in taxable income. Although South Africa does not impose VAT on crypto asset transactions, companies that accept cryptocurrencies as a means of payment are required to pay VAT on the goods or services they sell. In addition, South African residents are required to pay taxes on crypto asset income worldwide, while non-residents are only required to pay taxes on crypto asset income generated in South Africa. SARS ensures tax compliance of crypto asset transactions through information sharing, audits and inspections, and imposes penalties and interest on taxpayers who fail to declare or pay taxes truthfully. At the same time, like most countries, South Africa does not tax the purchase of cryptocurrencies, but only taxes the sale, exchange, use of cryptocurrencies for payment, mining, etc.
5. Regulatory system related to crypto assets in South Africa
South Africa is one of the most cryptocurrency-friendly countries in Africa. The South African Reserve Bank (SARB) has not explicitly banned the use of cryptocurrencies, and individuals and businesses can buy, sell and trade cryptocurrencies through various exchanges and platforms.
In terms of the regulatory framework for crypto assets, South Africa has made several adjustments in the taxation and regulation of crypto assets in recent years. In 2019, the South African Reserve Bank (SARB) issued a consultation document on crypto assets and related activities, clarifying the regulatory framework for crypto assets, which marked the beginning of South Africa's establishment of a regulatory system for crypto assets from scratch. In 2020, SARS began to more strictly enforce the tax policy on crypto assets, requiring taxpayers to report all crypto-related transactions in detail. This policy adjustment sent a signal that the government would strengthen tax compliance and prevent tax evasion. In June 2021, two of South Africa's most famous cryptocurrency exchanges (Luno and VALR) confirmed that SARS had contacted them to provide information about some of their customers that they were legally obliged to provide. In 2021, South Africa adopted the Common Reporting Standard (CRS) to combat tax evasion and money laundering using crypto assets. In March 2023, South Africa signed up to the Crypto-Asset Reporting Framework (CARF) standard, which has been adopted by 48 countries and is scheduled to be implemented by 2027, when South African cryptocurrency exchanges will gradually meet these reporting requirements.
Meanwhile, in terms of financial regulation, South Africa’s financial sector has further reformed, requiring crypto asset service providers (CASPs) to register and comply with anti-money laundering (AML) and counter-terrorism financing (CFT) regulations to regulate the crypto asset market, protect investors and improve market transparency. The Intergovernmental Fintech Working Group (IFWG) has listed several risks caused by South Africa’s continued lack of regulation of crypto assets and crypto asset service providers, and combating tax evasion and illegal tax avoidance schemes is also one of the goals listed by the IFWG for regulating crypto assets.
In October 2022, the Financial Sector Conduct Authority (FSCA) of South Africa determined that crypto assets (described as "digital representations of value") are financial products and are regulated by the FSCA under Section 1(h) of the Financial Advisory and Intermediary Services Act (FAIS). Every cryptocurrency service provider must be authorized by the FSCA to operate in this area and apply for such a license, and existing providers must apply by the end of 2023. Cryptocurrency exchanges must register with the FSCA and comply with specific regulatory requirements, including AML and Know Your Customer (KYC) requirements. The FSCA will be responsible for monitoring and enforcing compliance with these regulations, and will also need to maintain a certain level of capital and financial resources to ensure that they can meet their financial obligations to customers. The FSCA has the power to impose penalties or sanctions on cryptocurrency exchanges that fail to comply with these regulations. On December 19, 2022, amendments to the Financial Intelligence Centre Act (FICA) defined cryptocurrency service providers as "responsible institutions", making it no longer legal to anonymously handle crypto assets in South Africa.
South African regulators have created a balanced, positive and transparent regulatory environment and worked with industry stakeholders to pave the way for the booming cryptocurrency ecosystem in South Africa. At the same time, South Africa has continued to experience currency depreciation and inflation, which has prompted many South Africans to explore other forms of investment and financial transactions. With the publicity and promotion of cryptocurrency companies, cryptocurrency has attracted the attention of many South Africans with its decentralized and borderless nature. Now people can use South African rand to easily purchase cryptocurrency through exchanges, cryptocurrency ATMs, intermediary brokers, peer-to-peer P2P markets and other channels. These factors have undoubtedly pushed South Africa into the era of cryptocurrency payments.
6. Summary and Outlook of South Africa’s Crypto Asset Tax System
In general, South Africa's tax policy on crypto assets is relatively flexible, aiming to ensure tax fairness and prevent tax evasion. Compared with some countries, South Africa has adopted a more pragmatic attitude. Specifically, compared with developed countries such as the United States and the United Kingdom, South Africa emphasizes tax compliance in the regulation and tax policy of crypto assets, requiring individuals and companies to include relevant income from crypto assets when declaring income; levying capital gains tax and income tax on the trading and holding of crypto assets, rather than value-added tax; and focusing more on preventing financial crimes and protecting the interests of investors in regulation, rather than comprehensively restricting or prohibiting crypto asset transactions.
Despite its open attitude towards crypto assets, the South African government is also aware of the risks involved, such as money laundering and tax evasion. By establishing a detailed tax and regulatory framework, South Africa hopes to strike a balance between promoting innovation and protecting the financial system.
In the future, South Africa may further refine its regulatory policies on crypto assets, especially in terms of tax declaration and anti-money laundering. At the same time, as technology develops, the government may explore the regulatory framework for stablecoins and tokenized assets to cope with the rapid changes in financial technology.