The South African Revenue Service has set its sights on crypto asset holders who have failed to disclose crypto-related transactions on their tax returns in recent years.

A dedicated cryptocurrency asset unit, which forms part of the Sars audit team, has begun sending letters to taxpayers whose tax returns have omitted their activities on cryptocurrency exchanges and the tax liability those transactions put on them.

According Thomas Lobban, director at Ibex Consulting (a division of Latita Africa) audits generally go back as far as five years, although Sars can go back even further. Sars uses data collected from cryptocurrency exchanges and compares that to submitted tax returns to spot discrepancies in reporting and flag taxpayers whose returns require closer inspection.

“Sars is entitled to go to any person and request information from them regarding you about your tax affairs, including cryptocurrency exchanges,” Lobban said in an interview with TechCentral. “The Sars team is well versed in crypto matters, they are intelligent, they are aggressively pursuing their mandate and they are well resourced to do so.”

Lobban said Sars has for some time been working on recruiting people with the technical nous to oversee its crypto audits. The interventions are part of South Africa’s efforts to comply better with the policies of the Financial Action Task Force (FAFT). FAFT is an intergovernmental body that aims to combat money laundering and terrorism financing, and South Africa aims to be removed from an FAFT “grey list” by June to ensure it can attract more foreign direct investment.

Last year, Sars began sending letters to taxpayers notifying them that it was aware that they had carried out crypto transactions, advising them to correct the situation, either by submitting a revised return or by responding to the letter or submitting a “voluntary disclosure programme” (VDP) application within 21 days of recieving notification.

Amnesty

The Sars VDP is an amnesty programme that imposes no or very low penalties to taxpayers who have understated their income on their tax returns. It also helps taxpayers avoid possible prosecution.

But the VDP’s framework only applies if an application was made by the taxpayer voluntarily, so those who have already received notification of non-compliance from Sars are not protected by it, said Lobban. However, Sars, in its letters to crypto asset holders, has encouraged voluntary disclosure as a preferrable remedy.

“Failure to declare crypto asset gains or income will result in Sars conducting a comprehensive audit of your tax affairs, which may attract assessment, interest and penalties… In the event you intend to use VDP, notify us within 21 days from the date of issue of this letter,” the crypto asset unit said in a letter to one taxpayer.

Read: Crypto traders should not fear Sars disclosures: Luno

Lobban advised that taxpayers who are non-compliant should “take the first-mover advantage” by submitting either a revised return or filling in a VPD application. In its engagements, Ibex Consulting has witnessed that those who wait for Sars to audit them end up having to pay penalty charges of up to 100% of the tax liability.

“If you receive notification, engage openly with the crypto unit, give them the documents they want and negotiate the penalty percentage,” said Lobban.

The documents the Sars crypto asset unit requires upon notification are:

Spreadsheets from the relevant crypto exchanges: These reflect a user’s transaction history and should not be edited in any way as this may attract prosecution, said Lobban.
Crypto IDs for all cryto wallets: These are the identifiers Sars uses to track a person’s crypto transactions on exchanges.

Sometimes, PDF statements from the crypto exchange are also required.

Lobban said taxpayers should be aware that when the crypto asset team engages with them, it is usually only aware of the income portion of their crypto transactions and calculates their tax liability based on that alone. Taxpayers can lower this liability by providing evidence of expenses related to these transactions and the acquisition of their crypto assets.

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